The decline in sugar prices, which fell to a 20-month low, may not have too much further to go, given the potential for weather concerns and a switching by mills to producing ethanol.

New York raw sugar futures for July delivery touched 20.13 cents a pound on Wednesday, their lowest since September 2010, and taking nearly to 18% their decline over the past month.

The drop has been attributed to improved hopes for supplies from India, the second-ranked producer, and Thailand, the second biggest exporter, besides the impact of a depreciating real on the industry in Brazil, by far the largest sugar producer and shipper.

"The impact of the weaker real has been to reduce the impact of the falling international dollar-denominated prices to Brazilian producers," Macquarie said.

"As such, we have seen a rise in forward hedging and origin selling for dollar revenues."

'Downside will be limited'

And the outlook in the short-term "appears more bearish than bullish", Macquarie said, noting the pressure from extra Indian exports besides the weakened technical picture.

The July contract below all major moving averages and in the last session fell below the 20.40 cents-a-pound level, the 2011 low for a near-term-contract, which had been expected to offer some resistance to declines.

However, at about 18-19 cents a pound "further downside will be limited" by the choice many Brazilian mills have to produce ethanol, rather than sugar, from cane, and with the tipping point seen by many analysts at just below current levels.

Furthermore, "additional price weakness will begin to hurt some of the marginal cost producers – not just in Brazil but elsewhere" the bank said.

"Prices in India have risen lately, and although the 1m tonnes of exports has been agreed, export margins will be poor for local mills."

India concern

At Standard Chartered, analyst Abah Ofon forecast a rebound in prices, given the potential this year for another disappointing Brazilian cane harvest, for which downgrades have already started, and a threat posed by dry weather to Maharashtra, India's top sugar producing state.

While it was "still too early to be definitive" about the outlook for India's monsoon season, which starts in June, "poor rains in India can severely impact yields".

"According to some local industry reports, India's sugar exports in the 2012-13 season could drop more than 30% year on year, due in part to dry weather in key producing regions like Maharashtra."

Talk of the start of an El Nino weather pattern, which has kicked off with the end of two years of La Nina, "could spook the market and trigger panic demand should this weather risk crystallise", Mr Ofon added.

"On balance, we believe the decline in sugar prices will be short-lived," he said, recommending long positions in October sugar, currently trading at 20.76 cents a pound, "for an eventual rebound towards the 25-28-cents-a-pound level".

Futures curve

Separately, Commerzbank noted the strength of distant contracts compared with forward ones, with the July 2013 contract, for instance, trading at 21.79 cents a pound, a premium of nearly 1.5 cents to the July 2012 lot.

The smaller decline in further-away contracts compared with near-term ones may be down to expectations of weaker growth ahead in Brazilian output.

"The International Sugar Organization only expects the sugar cane crop in Brazil to grow by 3% a year between 2010 and 2020, as compared to an annual growth rate of 10% between 2000 and 2010," Commerzbank noted.

The July 2012 lot closed at 20.38 cents a pound in New York, up 0.1%.