Sugar investors should brace for an "extremely bumpy time", and potentially fresh record prices, as India grapples with a supply shortage which looks set to leave it relying on imports for a third successive year, leading analysts have said.

The forecast came as white sugar hit a record high in London.

The government in India, the world's biggest sugar consumer, faces a tricky task maintaining supplies against a backdrop of global and domestic shortages, with stocks down by more than 80% in a year to less than 2m tonnes.

"Delhi is over a barrel for the next 12 months, living hand-to-mouth as far as sugar supply is concerned," a report by VM Group said.

The course of the sugar market depends on Delhi's ability to buy sufficient sugar without triggering a jump in prices to "unpalatable" levels.

"We face the almost certain prospect of continued extreme sugar price volatility for the next 12 months," the report, commissioned by BNP Paribas Fortis, said.

'Speculative investment frenzy'

It looked "quite feasible" that New York prices could jump to 30 cents a pound, handsomely beating September's 28-year peak of 24.85 cents a pound, and potentially go even higher.

However, there was "no scope" for prices returning to the 65 cents a pound hit in the sugar crisis of November 1974, following three successive years when demand for sugar outstripped production.

"It's difficult to make a case for much beyond 30 cents a pound largely because of structural changes in the market," VM said, noting the introduction of corn-based sweeteners as alternatives to sugar in industrial use.

'Sweaty moments'

India, which was a sugar exporter until last marketing year, looked likely to import at least 8m tonnes in 2009-10 and 3m tonnes in 2010-11, even assuming a better monsoon next year, VM Group said.

However, the government would have to be careful to avoid angering cane farmers who last month set a train carrying Brazilian sugar on fire in protest at the level of imports.

"In the corridors of India's Planning Commission, there will be some sweaty moments in the coming months," the report said.

"Two successive seasons of domestic shortages have caused tempers to flare. What might a third do?"

'Fundamentals remain strong'

The comments came as sugar rose 1.6% to hit $629 a tonne, the highest since the commodity began trading in London in 1983, largely on concerns over Indian supplies.

Also, India's agriculture minister said that the country wanted to rebuild stocks to 6m-8m tonnes when the market settles down.

Nick Penney, at Sucden Financial in London, said: "Sugar fundamentals remain strong and reports of Iran purchases of three cargoes of raw sugar seemed to justify the rebound from last week's lows."

New York sugar for March closed up 0.38 cents at 23.04 cents a pound.