After reaching a record high in December, Scotiabank’s commodity price index, which measures price trends in 32 of Canada’s major exports, dropped 5.2% month-over-month in January. The all items index currently stands 0.9% below a year earlier.

“A sharp decline in the oil & gas index, partly linked to El Nino weather conditions, led overall commodity prices lower in January,” said Patricia Mohr, vp and commodity market specialist at Scotia Economics.

“The metal and mineral index also lost ground, as investment/hedge funds and CTAs (commodity trading advisors) took profits in base metals. A moderate build in LME inventories of both copper and zinc since late November, combined with expectations of new mine development by late 2007, triggered profit-taking, though prices are expected to rebound in coming months,” Mohr added.

According to the report, a rebalancing of portfolios by commodity-index funds during the week of January 8 alongside re-indexing of the benchmark Dow Jones-AIG commodity index (DJ-AIGCI) contributed to a wave of profit-taking across commodities. While gold prices also plummeted briefly in early January, prices snapped back quickly, as momentum players and CTAs built long positions, and as jewellery manufacturers and Far Eastern investors stepped up their physical buying at lower prices.

Finally, the agricultural index edged down in January — with slightly lower wheat and barley prices — while the forest products Index inched up as lumber prices rallied modestly ahead of the spring building season. In view of the downturn in U.S. markets, Canadian lumber producers are turning to stronger markets in the Middle East, Asia and Europe, a development not seen for many years.