SURGING demand from China, the growing fashion for alternative fuels and some of the driest weather conditions on record have pushed crop prices to their highest levels for years, leading some analysts to suggest we are at the start of a multi-year bull market in everything from wheat to milk.

Maize prices have soared by 53% over the past 12 months as demand from green-energy companies has rocketed.

Freak weather conditions have played havoc with the past year’s harvests around the globe. Australia, the world’s sixth-biggest exporter of agricultural produce, has been suffering its worst drought for more then a century. In America, farmers are bracing themselves for another hot and dry summer.

The surge in crop prices has pushed up the price of food on supermarket shelves worldwide. Earlier this year, a leap in the price of maize, used to make tortillas, the staple of the Mexican diet, sparked riots in the country.

It has also been causing headaches for central bankers by pushing up the rate of inflation. The governor of New Zealand’s central bank blamed a 60% surge in milk prices over the past year for his decision to hike interest rates last week. Food prices in Britain rose 6% in the 12 months to April – their fastest rate for six years and well above the general inflation rate of 2.8%.

Despite the recent price rises, a growing groundswell of investment professionals think that the boom in “softs” – agricultural commodities – has only just begun. They believe investors who back softs now will not be disappointed in five to ten years’ time.

Rodolphe Roche of Schroders, a fund manager, said: “The soft-commodities sector has largely been left behind by the roaring commodity boom that has swept through the oil and metals markets over the past five years. It is still at the start of its bull market.”

Over the past five years, the Goldman Sachs Agriculture index has risen by 9%, while industrial metals have soared 318% over the same period. Energy has risen by 104% and precious metals 105%.

The price of most foodstuffs is still 80% lower in real terms than it was 30 years ago. This means that if prices were to double in the next five years they would still only be back to half their historic average.

Jim Rogers, the former partner of hedge fund guru George Soros, and one of the highest-profile advocates of agricultural commodities, believes the bull market could continue for another 15 years. He said: “Wheat, soya, maize, orange juice are all far below their all-time highs. There will be fortunes made in agriculture in the next decade.”

Private investors have started to take note. City high-flyers have been snapping up farmland in the belief that crop prices will soar.

In the equity markets investors have been backing companies benefiting from the growing use of alternative fuels derived from crops, or biofuels, sending them to record highs. This has led some commentators to liken the biofuel boom to the technology bubble of the late 1990s. Then the fad proved short-lived, and traders suffered big losses when the bubble burst.

However, many City analysts believe that the market for softs has stronger foundations. Bulls argue that the factors that have driven up the price of hard commodities such as metals also apply to softs: strong demand at a time of fairly limited supply.

Bob Haber, manager of the Fidelity American Special Situations fund, said: “Each year the world has an extra 50m to 75m mouths to feed at a time when world food stores are at historically low levels.”

Growing affluence around the world is also changing eating habits, particularly in the fast-developing economies of China and India. As the Chinese get richer, they are turning from a predominantly vegetable-based diet to one that includes more meat and dairy products.

The Organisation for Economic Cooperation and Development reckons that beef consumption in developing countries such as China will increase by nearly a third by 2015 as dietary habits change. About 9kg of feed is required to produce 1kg of beef, so meat consumption has an effect on wheat and maize as well as cattle prices.

There is also increasing global demand for soft commodities in the use of alternative fuels. Governments keen to cut carbon emissions and find alternatives to oil are driving the market for ethanol and other biofuels. The US government is committed to cutting dependency on oil by 20% by 2017 – mainly through a fivefold increase in the use of renewable fuels. About 20% of America’s maize crop is now set aside for ethanol production, compared with 3% just four years ago.

In Brazil, the government is investing millions of dollars in sugar cane to be turned into ethanol for domestic and export use. It is already the world’s largest exporter, and by 2010 it plans to more than double ethanol exports from £308m to £667m.

The British government wants 5% of all fuel sales to be biofuels by 2010 – a twentyfold increase on today’s levels. Gordon Brown even suggested last week that train operators should consider switching to crop-based fuels. Virgin Trains has already started a six-month trial of a biofuel passenger train.

Neil Woodford of Invesco Perpetual, a fund manager, believes this push to use green energy will cause crop prices to soar.

He said: “There is only a limited amount of agricultural land, and as you divert it away from food, you create tensions in supply. This will create an environment in which prices are likely to move up significantly and we are already seeing that in sugar, maize, soya, and palm oil.”

However, investing in agricultural commodities is not without risks. Darius McDer-mott of Chelsea Financial Services, an adviser, said: “This is a very specialist area of investment with a high degree of risk. While some exposure may be reasonable within a broadly-based portfolio, soft commodities can be very volatile and the conditions supporting higher prices can change fast.”

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