THE INVESTOR'S VIEW/Croesus:The prices of a wide range of commodities from oil to copper and silver has been rising for several years. Many price rises have been dramatic and a large number of new players have been attracted into the commodities markets.

Historically, the participants in the commodities markets have been either involved in the physical underlying markets, and/or speculatively traded commodity futures contracts in search of short-term gains.

More recently, long-term investors have begun to invest in commodities as a separate asset class driven by a view that growth in global demand will sustain a long period of rising commodity prices.

Another attraction of commodities for such investors is that they have a very low correlation with equity markets. In other words, commodity prices behave in a way that bears little or no relationship to price movements in stock markets. As a result, from a portfolio perspective, they are very good at diversifying risk.

The price of food and cereals has been particularly bullish this year. This is partly as a direct consequence of the rising oil price combined with government sponsored policies to encourage the reduction of greenhouse gas emissions.

Crops are now being planted worldwide on a large scale for biofuel production. An unintended consequence of this is that the price of crops for food production is now being pushed higher. This is fuelling the view that we may be just in the early phase of a new long-term trend of rising food prices.

Agriculture and food production still remains a very important part of the Irish economy. If a sustained long- term trend of higher food price inflation emerges, it can only be good for the economy.

The impact is already being felt, for example the 28.7 per cent rise in the producer milk price for the 12 months to July.

For companies operating in the food sector, an environment where the price of the key basic raw material is rising is a double- edged sword since many companies may have difficulty in fully passing on higher input costs to their final customers.

The quoted Irish food sector consists of an eclectic mix of companies as can be seen in the table. The largest is Kerry Group, which was the first Irish Co-op to transform itself into a quoted plc. Kerry has since grown from an Irish dairy processing operation to becoming a leading food ingredient company. About 70 per cent of its profits are now generated from its overseas activities.

Over the past two years, rising energy prices and increased supply chain costs have put pressure on profit margins. However, ingredient margins have improved of late and top line sales growth has resumed.

In 2005 and 2006 the Kerry share price underperformed the Iseq. It has outperformed in 2007 and this could well be the beginning of a medium-term phase of somewhat better share price performance.

After several years of strong growth, IAWS has found the going tougher over the past year. The rising trend of raw material and input cost increases has put pressure on profit margins. The company expects this trend to continue and is taking initiatives to restore profit margins.

Its main business is the manufacturing and distribution of part-baked goods in Ireland, France, the US and Canada. Many of its products are single-serve, non-packaged and premium products. This, combined with its low dependence on the large retail multiples, puts it in a good position to push through price increases to recover higher raw material costs.

Greencore is facing similar challenges with regard to the convenience-foods segment of its business. Like many food manufacturers, the time delay in recovering rising input costs has led to a squeeze on profit margins. On the other hand, Greencore's malt business is benefiting from booming global cereals markets and profits from this division are benefiting.

The table highlights that so far this year, the share price performance of this group of companies has been poor with the exception of Glanbia, Kerry and the tiny Donegal Creameries.

In valuation terms they are not particularly cheap as indicated by their price-earnings ratios. Fundamental and rapidly evolving shifts in global commodity and food markets are presenting these companies with new challenges.

However, the long-term prognosis for food companies is good, particularly those such as Kerry and IAWS which have a proven ability to develop new business areas through organic growth and acquisition.