Investors should tread warily in banking on an extended slide in sugar prices, given the threat of production threats outside Brazil, and the potential for Chinese buying, banks said - even as futures fell to a two-year low.
Raw sugar futures, which on Wednesday extended their decline of some 20% since late July, look set to stay depressed for now, given the attention being paid to the pick-up in the cane harvest in Brazil's key Centre South region, after rain delayed start to the season.
"The market appears to be focusing solely on the news of growing supply from Brazil," Commerzbank said, meaning that forecasts of a drop in Indian supplies, thanks to a weak monsoon, were offering "no effective crutch for the price".
On the demand side, China offered a potential support for values in the offing, with the National Development and Reform Commission signalling that it was prepared to act after domestic prices fell below a "reasonable" level.
The government in June completed a stockpiling plan, but of 500,000 tonnes, half the amount originally intended.
"If China buys up sugar on the domestic market in a bid to stabilise local prices, [Chinese] sugar refineries could resort to cheaper imports at world market prices, thereby helping to diminish the [global] supply surplus," Commerzbank said.
'Quite a few threats'
However, the focus on Brazil was "likely to change at the latest when the Brazilian sugar cane harvest comes to an end in November, allowing the price to recover", the bank added.
And the comments were echoed by Macquarie which said that, while prices looked to be "supressed" into the end of the month "by the increased availability of Brazilian raw sugar", values will strengthen in the October-to-December period.
The market faced "quite a few" threats to production, including the weak Indian monsoon, which could push it back to importing in sugar in the 2012-13 year, starting next month.
"There are also risks in Thailand," the second-ranked exporter, "due to potential El Nino-related dry weather that may stress cane development," Macquarie analysts Kona Haque said.
On demand, Ms Haque said she was "confident that there will be plenty of physical demand" from importers in markets such as Asia, Europe and the Middle East, "particularly for the beverages market, where high corn prices may make high fructose corn syrup (HFCS) an uncompetitive sweetener".
Price spike ahead?
The drop in prices, which have tumbled some 20% from a late-July high, means that the "negative sentiment associated with the current surplus has been priced in", Ms Haque said.
Futures will "likely consolidate at these 19-21 cents-a-pound levels until the new season begins" next month, and could witness a sharp rebound, if production threats take hold, prompting speculators to perform an about-turn.
"We have noticed new shorts enter the New York futures, which could leave prices vulnerable to a break to the upside next quarter."
Prices will average 23 cents a pound in the last three months of 2012, she forecast, a cut of 1.7 cents a pound for the bank's previous estimate but well above current values.
New York's October contract closed down 0.6% at 18.89 cents a pound, the weakest finish for a spot contract since August 2010.