The world is sitting on a huge stockpile of sugar, but the global supply outlook will tighten into next year due to rain-induced crop problems in Brazil and falling output in India, auguring for higher prices.

The International Sugar Organization (ISO) estimates that global stocks of the sweetener will stand at around 70 million tonnes by the end of September, some 8-9 million tonnes more than in the same year-ago period.

The London-based ISO's preliminary projections foresee stocks falling just 2-3 million tonnes by September 2009.

However, despite the high stocks, many traders believe sugar prices will rise in the medium term as supply from key growers Brazil and India tightens, and as demand increases steadily.

The quality of cane in Brazil, the world's top grower, is poorer this year than last year due to heavy rains early in the season, and mills are diverting more cane to make ethanol biofuel instead of sugar.

Several analysts also expect India, the world's number two sugar grower and top consumer, to shift from being a net exporter to a net importer in a few years as its output falls.

Benchmark raw sugar futures, an indicator of physical prices, have already risen 28 percent this year.

ICE benchmark front-month raw sugar futures were down 0.25 cent or 1.8 percent to 13.60 cents a lb on Thursday.

According to a Reuters poll of analysts last month, the sugar market will move towards a deficit this year, forcing prices sharply higher.

The poll projected that ICE front-month futures would surge 38 percent year-on-year to 14.95 cents a lb by the end of 2008.

This rise is a reflection of expectations of increased demand for cane-based ethanol, reduced availability of sugar, tightening sugar supplies and increasing demand for the sweetener, notably from fast-growing emerging economies.

A strong appetite by investment funds for soft commodity futures this year has also contributed to price increases.

"Production (of sugar) next year will go down," said Sergey Gudoshnikov, a senior economist with the ISO. "A key question will be India -- whether surplus stocks will be available for the world market or not."

After a record output of 28.4 million tonnes in India last year, output is set to fall in 2008/09 as farmers planted less cane and more wheat.

Atul Pandey, senior manager of Bunge India Pvt. Ltd, saw Indian sugar output falling.
"In my view, sugar production is likely to be not less than 22 to 22.5 million tonnes in 2008/09," he said.

The trend is likely to continue in the year to September 2010 as poor rains have hit cane planting, according to Nikhil Sawhney, corporate vice-president of Triveni Engineering and Industries Ltd, India's third-biggest producer.

Pandey forecast Indian closing stocks at 11 million tonnes at end-September 2008, leaving a small window for exports of about 2 million tonnes in 2008/09.

But if the Indian government were to ban sugar exports, for example, this sugar would not be available on the world market.-Reuters