Bank of Nova Scotia’s commodity price index, which measures price trends in 32 of Canada’s major exports, rose by a 1.3% month-over-month in January, after five consecutive monthly declines. Nevertheless, the all items index remains 38.2% below the July 2008 peak and 19.6% below a year ago.

A big jump in the agricultural index, up 9.5% month-over-month, led the way in January. Canola prices, the highest value Canadian crop, strengthened significantly in response to buying by China’s State Reserve Bureau, which is building up reserves of key food supplies to support domestic farmers and as a hedge against the risk of steep, sudden price increases.

“China’s imports of Canadian canola are approaching the substantial volumes shipped to Japan and could top two million tonnes in 2008-09, up sharply from 960,000 tonnes in the previous 12 months, which is welcome news for Prairie farmers who harvested a record canola crop last autumn,” says Patricia Mohr, vice president of economics and commodities market specialist at Scotiabank.

Most base metal prices lifted off their near-term lows in December. As with grains, China was a big factor in boosting copper and zinc prices, as the State Reserve Bureau bought volumes at bargain prices for its strategic inventories and in support of China’s large smelting and refining industry. China’s overseas investment in mining and energy is heating up to secure supplies.

Raw material demand will also be boosted by China’s massive infrastructure spending program (4.16 trillion RMB spread over two-and-a-quarter years and equivalent to more than 6% of nominal gross domestic product in each of 2009 and 2010) announced on Nov. 9, 2008 to counter the downturn in exports and private sector investment.

“While the precise size of the package is difficult to gauge, with only 1.2 trillion RMB coming directly from Beijing and the balance to come from provincial and local governments, corporations and bank financing, Beijing is determined to revitalize its economy to counter rising unemployment and has already expanded its spending initiatives,” adds Mohr. “Measures to bolster nine key industries have or will be announced ahead of the National People’s Congress on March 5. The impact of these programs should start to support industrial activity in the second half of 2009, with China potentially leading the recovery in world growth.”

After five consecutive monthly declines, the metal and mineral index rose in January, as gains in base and precious metals, slightly higher sulphur and cobalt prices and unchanged potash prices more than offset lower uranium and molybdenum prices.

“Nitrogen fertilizer prices are beginning to pick up, after tumbling since last summer. While the credit crunch will continue to weigh, particularly on sulphur and ammonia, where industrial demand looms large, the fertilizer sector is likely to see recovery before many other industries,” says Mohr.

Urea prices have climbed back to US$275 a tonne in mid-February from a floor of US$212-215 in early 2009 alongside a pick-up in Southeast Asian demand (Vietnam, Pakistan, Sri Lanka). Constrained output in the Ukraine, where prices approached cash costs of production and hurt by the cutoff of natural gas feedstock supplies from Russia, contributed to the improvement. Prices were as high as US$830 in July 2008.

Spot potash prices remain unchanged in January and February 2009 at a record US$872.50 per tonne, though new business has come to a virtual halt, and this price level reflects transactions completed last year.

“Nevertheless, producers have not dropped prices and are determined to hold onto the price gains of the past two years, even if this means negligible sales in the near-term. Producers want to avoid undercutting fertilizer distributors who paid high spot market prices in 2008,” says Mohr. “The contract shipments which do occur in the first half of 2009 will take place at lucrative levels, reflecting recently negotiated contracts with Japan, South Korea and Malaysia.”