Sugar prices are set to rally until at least the third quarter of this year, as buyers in a "relatively desperate position" compete for dwindling supplies of the sweetener, Barclays Capital has said, as prices hit 30 cents a pound for the first time since 1981.

New York raw sugar, which touched 30.10 cents a pound on Monday, will average 30 cents a pound in the second and third quarters of the year, the investment bank said.

And the price looks poised to remain at least in the mid-to- low 20 cents-a-pound level entering 2011, evening assuming a jump of more than 40%, to 23m tonnes, in output from India, the second-ranked producer.

Prices below these levels "are difficult to perceive on the 12-month horizon because global stocks have been run down so sharply", BarCap said, noting world inventories at sufficient to meet 8.3 weeks' consumption compared with 20 weeks three years ago.

"The bull story for sugar is still firmly in pace for the next six months at least…. [and] it is difficult to perceive prices declining in the next harvesting year with any considerable momentum".

Output hits 

The bank estimated sugar production matching demand of 167.0m tonnes in the 2010-11 marketing year, which starts in September- some recovery, but insufficient to rebuild stocks.

"The Brazilian harvest continues to disappoint, with above-average rainfall continuing into the New Year," BarCap said.

Although some Brazilian sugar mills had remained open in what is normally a close period, "this is more in desperation to meet existing contract requirements than to provide additional supplies beyond current expectations".

'Relatively desperate position'

Demand, meanwhile, remained robust despite prices which remain near record highs in London and 29-year highs in New York.

"However, the reality has been a worsening in the market balance. Import tenders are emerging on a regular basis to compete for an ever-decreasing supply of sugar."

'Expect nervousness'

Sugar traders have had the psychologically important 30 cents-a-pound mark in mind for months, since the extent of the market squeeze began to become evident.

The odds of it hitting that level shortened two weeks ago when selling by commodity index funds as part of an annual reweighting exercise failed to make much dent in the rally from prices as low as 20 cents a pound as recently as December 9. 

Bulls made "several attempts" to push sugar to 30 cents a pound after the index fund reweighting finished, David Sadler at Sucden Financial Sugar said.

"One might expect nervousness at these lofty heights," he added.

New York's March contract ended up 3.5% at 29.72 cents a pound, with London white sugar for March closing 0.9% higher at $753.40 a tonne.