The prospect of a second successive year of sugar production falling short of demand will drive prices to their highest for four years, Rabobank has forecast.

The Dutch bank raised by 0.5 US cents per pound, to 16.0 US cents per pound, its forecast for average New York sugar prices in the first three months of 2010 on fears that the rebound in Indian production will prove weaker than initially forecast.

Although the market had been pricing in a rebound to 18-20m tonnes in India's output in 2009-10, from 14.7m tonnes a year before, these expectations are being reviewed following forecasts for a weaker-than-expected monsoon.

 "A reduction in the projected Indian rebound would clearly deepen the projected deficit for next year and suggests an upward revision of projected Indian imports in 2010," analyst Andy Duff said.

India is the world's biggest consumer of sugar, as well as the second-biggest producer, behind Brazil.

Mr Duff noted the "prospect" of a second successive year of global sugar demand outpacing production, following the deficit of 7m-8m tonnes in the 2008-09 marketing year, which ends in September.

India question

While New York sugar prices have risen by more than one-third over the last three months to stand at 17.14 cents a pound on Monday, they have not averaged more than 16 cents a pound for a quarter since the last three months of 2005.

However, Mr Duff noted several factors which could potentially send his forecast off whack, including the price of ethanol, which competes with food for sugar supplies, and an improvement in prospects for India's harvest, which hit 26.5m tonnes in 2007-08.

"The question is what level of downward revision of production in India is now priced into the market," he said.