Last year, the EIU's food, feedstuffs and beverages (FFB) price index rose by 16 per cent, the sharpest year-on-year rise since the index was introduced in 1990.

Grains and sugar led the surge, with price increases of 26 per cent and 50 per cent respectively, but beverages (up 9 per cent) and oilseeds (up 3 per cent) were also strong.

"Our latest market assessments point to another bullish year for soft commodities. In 2007, the FFB price index will rise a further 5 per cent," Kona Haque, senior commodities editor said.

"Buoyed by the biofuel industry, demand is outpacing supply in many markets, particularly those which have suffered from adverse growing conditions."

As a consequence, stocks will be drawn down further and prices, with the notable exception of sugar, will strengthen. Further support is emanating from institutional investors, who are maintaining long positions in soft markets.

In 2008, the index will undergo a modest decline of less than 2 per cent led by beverage commodities and sugar.

Grains and oilseeds will see the strongest rise in prices in 2007, of at least 7 per cent year on year. Weather anomalies associated with El Niño and competition between crops for land space is affecting supply prospects, whereas demand for food, feed and biofuel feedstocks continues to grow.

Maize, soybeans and palm oil will be in especially short supply following unfavourable conditions in the main producer regions and rising ethanol demand. Soybean meal will benefit from higher feedgrain prices.

Shortages of grains and oilseeds generally will persist in 2008 despite a positive producer response, and as stocks fall further, prices will remain firm, the report said.

The beverage price index has been revised up and will now rise by almost 3 per cent this year.

Uncertainty over Brazil's 2007/08 coffee-crop prospects has prompted speculative buying and hoarding by farmers, a trend that is likely to continue until the picture becomes clearer.

The cocoa market, which is now forecast to be in modest deficit, will also stay firm, while instability in Côte d'Ivoire continues to place a risk premium on prices. Both markets, together with tea, will move into surplus by 2008, causing prices to plummet, the report said.

Sugar is the only commodity for which the price index is forecast to fall this year.

Having peaked early last year, prices have been tumbling from their (slightly overvalued) highs of 2006. A large recovery in world sugar output is expected to exceed demand growth, leading to a substantial surplus and a 20-per-cent drop in the price.

As speculative investors continue to unwind their positions, a further decline of around 4 per cent is projected for 2008.

However, increased demand for sugar as a biofuel will support producer prices in the longer term, the report forecast.