Sugar prices, which have already fallen near two-year lows, may need to decline further to encourage demand, Czarnikow said, even as it narrowed its estimate for the world production surplus.

The sugar merchant cut by 1.4m tonnes, raw value, its forecast for the global output surplus in 2012-13, citing a higher estimate for consumption, while dry weather in India has worsened production prospects.

"Dry conditions in Maharashtra and Karnataka are hitting output," the group said, slashing to 25.9m tonnes its estimate of sugar output in India, the second-ranked producing country.

However, at 7.1m tonnes, Czarnikow's forecast for the sugar surplus was higher than that of many other observers, and implied continued pressure on prices, the London-based group said.

'Prices may need to fall'

"We continue to forecast a fourth, consecutive year of rising cane sugar production" said Czarnikow director Toby Cohen.

"But consumers may not respond as quickly as the market would like."

While the recent return in sugar prices below 20 cents a pound "should encourage demand after four years of slow growth, this is likely to be a gradual process", the group said.

"Prices may need to fall further to boost consumption."

New York sugar for October stood at 19.01 cents a pound ahead of the report's release, 0.3% higher on the day, but down more than 20% from highs in late July - and nearly 50% below a 30-year peak reached in February 2011.

Brazil outlook

The Czarnikow estimate included an upgrade of 1.2m tonnes to 33.5m tonnes in the forecast for sugar output from Brazil's key Centre South region, on a cane harvest of 525m tonnes.

"Rainfall delayed the start to the crushing season, but has boosted the quality of the cane," the group said.

The estimates are more upbeat than those from Unica, the milling industry group, which on Thursday cut its forecast for  Centre South 2012-13 sugar output by 400,000 tonnes to 32.7m tonnes, after early-season rains cut sugar content in cane.

On Wednesday, consultants Datagro downgraded by 1.4m tonnes to 31.3m tonnes its forecast for Centre South sugar output, citing disappointing yields and recent unexpected crop flowering.

"The cane crop is unexpectedly flowering, which has surprised the sector," Datagro president Plinio Nastari said.

Datagro revised it output estimates for the cane harvest in the key growing region, responsible for nearly 90% of Brazilian production, from 508.7m tonnes to 512.1m tonnes. 

Price outlook

The fall in sugar prices has defied some positive macroeconomic news, including the surprise decision by the Federal Reserve last week to further expand its monetary base and similar moves by the Bank of Japan this week.

However, many analysts remain negative towards prices as recent information from Brazil has supported views of a market surplus in the coming year, reducing the so called 'risk premium' priced in earlier in the year amid concerns of disruptions.

"As the global supply/demand balance has moved from deep deficit to surplus and with the expectation of a further surplus and build-up of stocks in 2012-13, the price cycle has followed suit," said Rabobank in its latest quarterly report.