Macquarie raised ideas about the damage to Brazil's cane crop from dry weather, but cautioned over the rally in prices, even as futures hit a two-month high – albeit still underperforming coffee, which soared a further 4%.
The bank said that, because of hot and dry weather, the cane harvest in Brazil's Centre South region, responsible for some 90% of domestic output, will come in at 585m tonnes in 2014-15, down 10m tonnes year on year on its own estimates.
"Extremely low" rainfall in the Centre South from December to February "has led to serious concerns that the new season's cane crop may see some yield losses", Macquarie analyst Kona Haque said.
"Cane development has slowed, and there are reports that some new cane planted last year has shrivelled up in the heat and lack of moisture, rather than maturing."
The forecast undershoots an estimate from the Unica cane industry group on Monday that cane output for the season, starting in April, will no longer exceed the 2013-14 result of 596m tonnes.
And it came as fears for the dryness continued to support prices of sugar, which hit 16.80 cents a pound on Wednesday for New York's best-traded May futures, a two month high for a nearest-but-one contract.
Arabica coffee futures - which have reacted even more strongly to the dryness concerns, given the prospect of far bigger damage to Brazil's output – hit 161.85 cents a pound in New York for May delivery, a 15-month high.
While central Brazil had received some rain over the weekend, "the growing areas for coffee and cane need consistent rain to permeate through hard dry soil otherwise it just runs off", Nick Penney at Sucden Financial said.
"Perhaps we sugar traders have been a little too sceptical on what is happening in Centre South Brazil."
However, Ms Haque cautioned that, unless damage to Brazilian cane production proves particularly severe, the sugar market may be storing up trouble for itself by sending futures soaring, in working against the process of eroding the sugar surplus needed to foster a longer-term price recovery.
World sugar output has exceeded demand by an aggregate 27.0m tonnes over the four seasons to 2013-14, which global stocks will end at 65.2m tonnes, according to the bank.
"In the 3-6 month period, the flat price needs to fall lower to 14 cents a pound, or that calendar spreads widen, to encourage more storing by producers," Ms Haque said, warning that higher values would "send the wrong signals to the market".
A price above 16 cents a pound "would incentivise more Indian raw sugar to be exported, a greater allocation to sugar vs ethanol by Brazilian mills, more forward selling of raw sugar by Thais, and deter Chinese imports".
"Any or all" of these factors would "merely keep the world sugar surplus higher for longer, leading to further price pressure down the line", Ms Haque cautioned.
"Given the largest surplus we still need to work off… a premature price rally would be immature."
Low sugar prices had been working to quell the output surplus, in appearing to leave few producers with a chance of profit.
The bank estimated production costs in Asia Pacific, Australia and South Africa at 16 cents a pound or more; in Thailand and Central America at at least 18 cents a pound; in Brazil at 17-19 cents a pound; and in the European Union and India at 20-22 cents a pound.
Raw sugar for May stood at 14.72 cents a pound in New York as of 09:00 local time (14:00 UK time), up 1.3%, with London white sugar for May up 0.7% at $459.00 a tonne.
New York arabica coffee for May was 2.9% higher at 159.30 cents a pound, with London robusta beans for May up 1.8% at $1,908 a tonne.