Sugar producers should sell into the strong market, Goldman Sachs has said, even as it raised its forecasts for prices of the sweetener for the next 12 months.

The advice came shortly before prices tanked 7% in New York to their lowest point of the year, before recovering some ground in late deals.

The investment bank said that prices would prove "high and volatile" for much of 2010 as India, the world's biggest sugar consumer, reveals its strategy for securing supplies in a market tightened by disappointing crops both at home and in Brazil, the biggest producer.

Even the next crop from Brazil's Centre South region, the source of 90% of its production, "would not be able to alleviate the current tight inventories".

"Brazilian sugar production could be limited by constraints on the capacity to produce sugar from the cane, the need to produce biofuel, and heavy rainfall in the autumn, which will likely cut sugar output," the investment bank said.

With India and China, the second and third biggest sugar producers, not to start harvests until the end of the year, "tight sugar market fundamentals will likely remain an overarching concern in 2010".

The bank lifted its forecast for sugar prices this quarter by 7 cents to 27 cents a pound.

'Supply response' 

However, that should not stop producers from selling into longer-dated futures which, while well below prices for near-term delivery, are also high by historic levels.

The rise in production stimulated by higher prices "will likely pressure prices lower from current historically high levels next year and beyond", Goldman said.

"With prices currently elevated across the long-dated forward curve, we recommend that sugar producers take advantage of the higher levels by implementing long-dated hedge programs."

Sugar for July 2011 delivery, for example, has fallen by 10% since a September high to 18.32 cents a pound, but its still amongst its highest levels of the last 30 years.

Price slumps 

The comments came shortly before raw sugar slumped by 7.0% to 25.70 cents a pound for New York's benchmark March contract. The lot closed down 5.3% at 26.17 cents a pound.

In London, white sugar ended down 2.0% at $728.20 a tonne.

The selling pressure was blamed on selling by investors alarmed by recent economic scares, including weak US data, attempts by China to curb credit growth, and concerns over the ability of some eurozone states such as Greece and Portugal to repay sovereign debt.