The extent of speculators' short bets in sugar derivatives, plus potential price boosts from ethanol, the Brazilian real and Indian setbacks, prompted Macquarie to offer solace to sugar bulls even as futures renewed their decline.
The bank restated its forecast that New York raw sugar futures will average 17.5 cent a pound in the April-to-June period, a performance which would make the quarter the weakest in three years.
However, it cautioned that there were factors, "that warrant close inspection… which could provide bullish surprises" to prices, which fell to 17.87 cents a pound in New York two weeks ago, the lowest, on a front contract basis, since August 2010.
Macquarie analyst Kona Haque said: "It is always slightly worrying when everyone is of the same view," that prices will trend lower.
One potential stimulus for higher prices is the record net short position, of 57,000 contracts, which managed money, a proxy for speculators, has built up in New York raw sugar futures and options.
"As futures prices start to fall lower to 17 cents a pound, as we expect into mid-year, then funds may find themselves unwilling to maintain further short exposure," Ms Haque said.
The market is "expecting Brazilian mills to switch to ethanol production, should prices hover at the 17 cents-a-pound mark for too long, and it is also aware that these prices are likely to deter most producers around the world from investing in further expansion".
At such low prices, "risks are more likely to be on the upside, rather than downside – and funds may want to start covering their shorts", a shift which would support prices.
On fundamentals, Indian output could disappoint undermined in 2012-13 by the impact of drought in some regions, and next season by a change by farmers to growing alternative crops.
"Despite another decent hike in the statutory cane prices, farmers in Maharashtra, Karnataka and Tamil Nadu could lower plantings or switch to other crops," Ms Haque said.
And Brazil could provide support by a strengthening of the real, which would make the country's exports more expensive in dollar terms, besides by a change by mills to turning cane into ethanol rather than sweeteners.
Macquarie said it saw Brazil's mills turning 54% of cane into ethanol, compared with a little over 50% in 2012-13, to provide biofuel for domestic mandates for blending into gasoline, and ship to the US, besides being encouraged by port delays to switch from sugar, of which a greater proportion is exported.
However, the comments failed to prevent investors selling sugar anew, sending the March contract 1.5% lower to 17.97 cents a pound in late deals, and the better-traded May lot down 0.6% to 18.05 cents a pound.
"A third consecutive global market surplus of sizeable proportion is expected to weigh on prices this year," the bank said, restating estimates of a surplus of 8.5m tonnes this season and 5.6m tonnes in 2013-14, on a September to October basis.
The International Sugar Organization last week lifted to 8.5m tonnes its estimate of the 2012-13 output surplus.