The rebound in sugar prices, which have revived by nearly 20% from early-May lows, may have far further to run as growing ethanol use, and a drive to rebuild depleted stocks, comes to bear.

Raw sugar prices, which closed up 0.7% to 15.36 cents a pound on Wednesday, will increase to an average of 18 cents a pound in the third and fourth quarters of 2010, Commerzbank said.

The bank acknowledged expectations that the market would return to surplus in 2010-11 thanks to stronger Brazilian and Indian crops, with the US Department of Agriculture forecasting that production will exceed consumption by 6m tonnes.

The "sugar scarcity" that drove prices to multi-decade highs in February, before hopes for new crops kicked in," is therefore easing", the bank said.

Depleted inventories

However, it warned that supplies still remained tight, after successive years of production shortfalls left world sugar inventories at the end of 2009-10 at their lowest level in 20 years, according to International Sugar Organisation data.

Meanwhile, demand for ethanol is "rising sharply". Ethanol accounts for more than half the sugar crop in Brazil, the top producer of the sweetener, where more than 90% of cars sold are able to run on the fuel.

"Furthermore, there is a risk that the harvest in India, commencing in October, will fall short of expectations and the global market surplus will be lower than expected," Commerzbank added.

Technical limits

However, Thomas Kujawa at Sucden Financial Sugar warned of the potential for short-term setbacks to prices, noting the risk of further eurozone upsets, besides limits signalled by technical factors.

"It still seems a bit adventurous to want to be long above 16 cents a pound in the current atmosphere," he added.