ANZ said recent price increases in staples reflected the temporary impact of unusual weather and that prices would revert to more normal levels once Australia's worst drought in a generation broke.

"The current sharp growth rates in world agricultural prices should not be sustained," ANZ economists said in a report entitled "Food Stress".

"That said, over the medium term, it does appear that aggregate food prices will attain a higher plateau."

ANZ said climate change, industrialisation and environmental degradation would limit food supply in the future.

But the greatest threat to food prices would come from the increased production of biofuels, created from grain or oilseeds and seen as a cleaner alternative to fossil fuels, they said.

"This will not only raise the costs of biofuel inputs (grains, oils and sugar), but will also, through increasing the price of feedstock, indirectly raise the costs of meat and dairy," the report said.

The changing dietary habits of the developing world will also impact on food prices, they said.

"In particular, dairy and to a lesser extent, meat prices are likely to continue to rise faster than historical averages."

In Australia in the short term, the largest price rises would be seen in fruit and vegetables while those products that rely on grains such as bread, cereals, dairy, eggs and meat would also be significantly higher.

"Over the medium term, we have concluded that there will be a permanent shift up in food prices," they said.

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