Montreal, Canada

For the first time since mid-2008, a host of commodities are either approaching a supply deficit situation or are heading even deeper into deficit. More than any other variable, a net supply deficit for a commodity will drive prices through the roof.

When a commodity becomes scarce, that’s usually the prime ingredient for a powerful bull market. And that’s exactly what’s happening this year for a host of raw materials as supplies grow tight amid shrinking inventories or production bottlenecks in the largest producing markets.

Over the past ninety days alone, tin, cotton, coffee, cocoa and sugar have entered a supply deficit or have approached supply-deficit conditions. That’s driven prices for these raw materials much higher over the last several months while spilling over into other edibles like corn, wheat and soybeans following poor harvests and expected crop downgrades from the USDA later this fall. Of the three largest grain markets, wheat is by far the most threatened by supply shortfalls.

Russia, one of the largest wheat producing nations in the world, has placed a moratorium on wheat exports until 2011 following a near disastrous harvest this summer; wheat prices have soared more than 60% since May. Corn is also following wheat higher lately, as farmers predict a lower crop yield following a dismal season where harvests were dampened by pervasive rains across the plains.

In the base metals arena, tin continues to offer the best risk adjusted gains going forward. Among the six most utilized industrial metals, tin surpassed its 2008 highs this week.

I suspect that supply deficits will shortly emerge for gold and silver. Both metals remain heavily in demand by investors and above ground supplies continue to shrink. South African production has more than halved since 1990 while China, the world’s largest gold producer, is suspect because nobody really knows how much gold she produces.

Gold is likely to approach a net supply deficit later in 2011 as a wave of new buyers emerge from central banks, hedge funds, pension funds, ETFs and individual investors amid a renewed bear market for the dollar and other paper money in an environment of low interest rates and sluggish growth in the advanced economies.