The sugar market will spike early next year as the squeeze caused by a second year of production shortfall comes to a head, Rabobank has said, forecasting prices will remain firm throughout 2010.

The rally which saw New York prices jump more than 20% in the seven trading days to last Friday looks a taste of things to come, as sugar buyers scramble for scarce supplies in the first quarter of 2010.

Crushings in Brazil, the world's top sugar producer, look unlikely to enjoy the "long tail" which improved sugar output early this year.

While Thailand's harvest has got off to a promising start, it had only "limited" ability to plug a global shortfall of more than 7m tonnes in 2009-10.

'Explosive upside movement'

"With Brazilian supplies essentially fully allocated, the question is how uncovered consumers can meet their first-half 2010 needs," a report from Rabobank's City office said.

"We therefore believe that consumers will be forced into the market at tome point and that this – or alternatively any further supply shocks – will be the catalyst that will force prices to spike in early 2010."

In previous times of market shortfall, prices had topped $0.40 a pound.

"While we are not suggesting prices will reach these heights, it does demonstrate the potential for a short yet explosive upside movement," the report added.

Rain damage 

The market should remain strong even after Brazil's 2010 harvest begins to revive supplies, given the "severely depleted levels" of global inventories.

Prices would "remain well above the long-term average throughout 2010", Rabobank said.

The report highlighted the impact of rain on Brazil's cane harvest, with industry group Unica continuing to cut output forecasts.

Lower than expected cane sugar levels, which require late-season drought stress for best yields, had been the main reason for the cut in sugar output.

Raw sugar for March stood 1.9% lower at 25.14 cents a pound at 13:00 GMT in New York.

In London, white sugar for March delivery was 1.3% lower at $659.50 a tonne.