Wheat prices at a two year high, copper hits a three month high, oil above $US81 a barrel, and other commodities such as sugar, coffee and cocoa rising, or at multi-decade highs.

With the world economy still sluggish and major consuming countries such as the US and Japan gripped by deflationary pressures, it's a good time to have a commodity price rally.

For metals it's the second time this year they have risen: they had a strong first quarter and then a very poor three months to June and then a great July.

But its wheat and a Russian drought that's driving world prices higher: July saw prices up 42%, the biggest rise in prices for the grain in 40 years.

Yesterday US prices (the key indicator) topped $US7 in trading Chicago and Kansas City (ending up 4.8% in Chicago at $US6.9345 a bushel and 3.7%, or 25.5 USc, at $US7.127 a bushel in Kansas City).

European wheat prices (milling wheat) rose past 200 euros a tonne in Paris.

The surge comes just after world wheat prices hit a nine month low in June on continuing fears that a second successive huge US crop and big harvests in Australia and Argentina would depress prices.

Now Russia has declared an emergency in seven regions (which cover much of its grain growing areas) because of the drought and bush fires which have so far killed 40 people.

Fears that Russia may limit exports to cap prices and conserve animal feed are driving much of the price action.

The Russian wheat harvest will fall to 50 million tonnes this year, 7 million tonnes less than forecast in June, according to the London-based International Grains Council.

That could slash Russia's wheat exports to 9.5 million tonnes, from 18 million tonnes in 2009.

But those fears are driving some panic buying, but actual shortages are unlikely.

America will still have what looks like its second or third largest crop on record and will be able to supply any shortfall in global markets.

Australian and Argentinean producers and exporters can still grab these high prices if they sell their still-to-be-harvested winter crops forward, rather than wait for prices to rise further.

They may continue rising, but they may not as news of the US wheat; corn and soybean harvests are released in the next two months and confirm their expected large yields.

Some US and European food companies have already started warning of price hikes later this year for bread, breakfast cereals and other products (and animal feeds) if world prices continue rising.

Australian food companies like Goodman Fielder might start feeling the pinch soon if they are not hedged the right way, or have left themselves uncovered in the hope prices will fall.

But the sluggish demand from consumers, even for basic foodstuffs, will make it harder to push through price rises and make them stick.

Food retailers here, in the US, Japan and Europe are finding it hard to grow sales faster than the continuing subdued rate of inflation.

Many beef producers will cut back on feedlotting if input costs are lifted by suppliers (that's what they did two years ago).

But just as we saw in 2007-08 with the last surge in world food prices (led by rice and grains), it's the poor countries that will feel the pain and crimp incomes.

The United Nations Food and Agriculture Organisation's grain price index has risen from 152 to 161 in the past month, but that puts it back in the region where it started in 2010.

It won't help China though which has been battling food price inflation off and on for the past three years.

The current very bad flooding in China and Pakistan could impact rice prices in coming months.

That's after drought cut rice and wheat yields in some parts of China earlier in the year, leading to lower production.

World stocks of the major grains however remain quite high, but a bad year could drain wheat reserves and set up a bigger crunch in 2011-12 if drought hits a major producer, such as Australia or the US.

Figures out yesterday from the Reserve Bank reveal that the sharp rise in wheat prices has already impacted our commodity price index.

"The largest contributors to the rise in July were increases in the estimated prices of iron ore and coal. The price of wheat also rose, while the price of gold fell. In Australian dollar terms, the index rose by 2.4 per cent in July, following an increase of 3.5 per cent in June (revised)," The RBA said.