Sugar Fundamentals Sweeten Up

Stronger demand and persistent rainfall in Brazil could push sugar prices to new highs.

Sugar prices soared on Tuesday even as a stronger U.S. dollar kept prices muted across soft commodities. Rain in Brazil has heightened concerns that the top sugar grower's yields won't be robust enough to meet strong demand from Mexico and India.

The sweetener has been the year's best-performing soft commodity with prices at levels not seen in more than 28 years. Supply issues have supported stronger prices -- Indian production faltered because a weak monsoon season left plantations dry and now Brazilian output is also threatened by weather. India, which swung from an exporter to an importer of sugar, has had to rely more heavily on Brazil for supplies and traders say Brazil has also seen stronger demand from Mexico and the U.S. Analysts expect sugar prices to hit 26 cents a pound.

Raw sugar for March delivery trading in New York gained 0.84 cent to settle at 24.94 cents a pound on Tuesday while the October contract, which expires on Wednesday, added 0.81 cent to settle at 23.46 cents. In London, white sugar futures touched a record level of $617.70 per metric ton before pulling back slightly to $616.

"Rainfall in Brazil is delaying the crush along with lowered sucrose levels; weak Indian output and still positive demand," said Barclays Capital analyst Sudakshina Unnikrishnan, who holds a near-term price target of 25 cents a pound.

Sugar shortages could mean good things for potash fertilizer producers since potash is essential to increase cane sucrose concentration, or the amount of sweetener than can be produced from cane. Brazil currently imports 90% of its potash needs, which could increase if more land is converted to cane fields.

Shares of potash companies closed Tuesday's trading session broadly lower with Potash Corp of Saskatchewan ( POT - news - people ) down by 39 cents, or 0.4%, at $90.69; Mosaic ( MOS - news - people ) off by 77 cents, or 1.6%, at $48.77 and Intrepid Potash ( IPI - news - people ) lower by 21 cents, or 0.9%, at $23.52.