Over the last 12 months, the biggest bull market in commodities has NOT been in gold, platinum or tin. Instead, the grains – or more specifically, wheat – have dominated the raw materials complex since late 2006.

Indeed, spring wheat has been the commodity king over the last year, during the lowest stockpiles of wheat in 60 years.

On February 25th, the price of top-quality spring wheat on the Minneapolis Grain Exchange surged more than 25% in one day. Spring wheat is now up more than fourfold, and outpacing all commodities by a country mile.

And everyone from consumers to bakers are paying top dollar in 2008 for bread and other baked goods. Suppliers are hiking their prices and distributors are ratcheting up their prices to protect shrinking margins.

In Montreal, my bakery has posted signs next to the cash register to explain why they’re raising bread prices. My bakery has raised prices on several occasions since December because of soaring input costs. Whole wheat, sourdough, rye, pumpernickel, baguette, and all other types of bread now fetch their highest prices in more than 20 years.

Why It’s Much More Expensive to Just Buy Bread

The best part is this grains story isn’t over yet. It’s true that no other segment of the commodities bull market has matched the rally in grains over the last 12 months, but the rally is still underway. And investors and speculators are sitting pretty.I recommended my Commodity Trend Alert subscribers invest in the grains for the first time in January 2007 – and we’re still running with the bulls with a 60% total return.Food Inflation Soaring – and Farmers Are Lovin’ it

Since February 2007, Hard Kansas City wheat has surged 129%, soybeans have soared 107% and corn prices have rallied 34%. That means you’ll pay more for your Quaker Oatmeal every morning with oats surging 61% year-over-year. Bran prices have gained 36% and barley has zoomed ahead with a 71% gain.

Other foodstuffs are also on a tear, including soybean oil, palm oil, dairy products and soft breakfast commodities like coffee and cocoa.

In 2006, for the first time in 15 years, global food production, at 0.9%, fell below the 1.2% growth rate of the world’s population. Increasingly, the world is at the forefront of a major food crisis, especially in the developing world where the United Nations has declared an emergency to meet chronic grain shortages.

The entire U.S. and international farm-belt is relishing huge profits since 2006. That’s a nice change compared to the 20 previous years of falling prices since the grains peaked in the early 1980s.

Until recently, U.S. farm income suffered from a major bear market that started in 1985. Lately, those same down-on-their-luck farmers have watched their incomes jump 22% over the last 12 months. Two years ago, income was barely climbing 1%.

As you can imagine, farmers are taking advantage of this income boost. They’re ramping up production as agricultural and food export prices have gained 30% over the past year. In fact, these higher prices have resulted in a total food trade surplus of US$3 billion versus US$915 million in February 2007.

Wheat Supplies Collapse…Everywhere But in the U.S.

Supply and demand dictates the primary trend for commodities more than any other single variable. Many commodities remain in net supply deficit this year and the situation is growing worse as agri-phobia grips the globe.

Global wheat harvests, for example, have been nothing short of disastrous since 2006. Argentina, Canada, Australia, Russia, Ukraine and other growers have produced some of the lowest yields in decades following major droughts.

As supplies continues to decline, only the United States has a net export capability in 2008 because the U.S. wheat supply still exceeds domestic demand. But even in America, inventories are set to plunge to their lowest levels in 60 years as the rest of the world increasingly absorbs the U.S. wheat surplus.

Exporters Slap Tariffs, Curb Exports

Many primary wheat producers are now limiting their grain exports. Kazakhstan, a leading exporter of spring wheat, announced export tariffs last week to curb sales. Argentina, China and Russia have also announced similar restrictions as wheat prices continue to skyrocket, hitting daily limits throughout most of the last 90 days on global exchanges.

Food inflation has arrived. Combined with US$100-plus crude oil and surging gasoline prices, it’s no wonder the American consumer is slowing down.

Out of Control

To be sure, agricultural commodities are severely overbought at these levels. Many institutional investors, including hedge funds and Commodity Trading Advisors are now heavily long on this sector with leverage.

A major reversal lies ahead for the grains and other soft commodities this spring. Several countries are aggressively planting wheat, particularly Australia and the Ukraine. These nations are struggling to boost domestic stockpiles, and any meaningful growth in yields will seriously cut this rally short overnight.

If you’re a new investor, I advise you sit on the sidelines and wait for a correction in agricultural prices. However, one segment of the commodity bull market remains distressed and that’s livestock and lean hogs. Livestock is still trading at the same levels compared to six years ago. I’ve got to believe that with inputs for feeder soaring, it’s only a matter of time until steak and bacon join the commodity bull market.

Also, I’m currently researching another way to ride the second wave of profits in soft commodities. I’ll give you details as soon as I can. Look for more information coming soon.

ERIC ROSEMAN, Investment Director

EDITOR’S NOTE: Eric’s Commodity Trend Alert subscribers are already sitting pretty with a nice 60% gain in grains over the last year. Now, Eric’s recommending the most strategic commodity plays to profit from the coming bull market in livestock. Click here to test-drive his commodity service, so you can profit from these easy-to-buy U.S. and Canadian commodity plays.