Food prices set to surge 50 per cent within five years

The Age (Australia): …The price of milk has risen 20 per cent in the past year, says Bill Barbour, and he should know. He's the investment manager at the DWS Global Agribusiness Fund, a $1.6 billion fund from Deutsche Bank that was formed last year to capitalise on what he calls "Ag-flation" — the sudden and irreversible upward momentum in food prices which is going to change the world as we know it.

…What is driving food prices higher? A bunch of factors has combined at the same time. In Australia there is drought, which reduces supply against unchanged demand. ANZ's chief economist Saul Eslake points out that the effect of the drought is only temporary: longer term falling EU subsidies will be a bigger driver of higher milk prices.

But a more important global force is climate change — or at least developments around climate change, such as the new limitations on land use and the push (especially in the US) to replace petrol with biofuel. In the US biofuel quotas from the Bush Administration are prompting a big increase in the price of corn. In the same way our higher milk prices push up butter and cheese prices, higher US corn prices push up the price of beef.

But the biggest driver behind rising food prices is widening appetites in China and India, where more than 2 billion people who once got by on a largely vegetarian diet are aspiring to diets like you, me or Homer Simpson.

US investment guru Jim Rogers — who correctly called the "hard commodities" boom of recent years — now says "soft" commodities will shine. He says: "There are three billion people in Asia and they're not going to lose their appetite because we've got new problems in the US."…