Dutch bank Rabobank expects the raw sugar price to average 12.9 cents per lb in 2009, up from 10.3 cents per lb in 2008, as market fundamentals improve. "Rabobank's preliminary projections suggest a more constructive outlook for the market next year," the bank said in a statement on Monday.

 

Rabobank said investment funds had driven the rally in raw sugar futures. Prices have surged by 30 percent since December 2007. "Inflows of fund money into the sugar market have driven the current rally, in spite of a weak fundamental outlook for 2008," it said, referring to an oversupply of the sweetener.

 

"The contrast between current prices and market fundamentals illustrates that the growing presence of the funds in the market has added a new and at times pivotal influence on market sentiment."

 

The catalyst for sugar's rally was widely seen as being index fund portfolio rebalancing, Rabobank said. "In the last 12 months, prices for many other agricultural commodities have rocketed to levels not seen for decades," it added.

 

"For these reasons, sugar appears to have been 'undervalued' over the last year, suggesting that it is likely to rise in price at some point in the future. This argument has provided significant incentive for funds to enter the sugar market."

 

Lausanne-based consultancy Kingsman SA earlier this month forecast a global sugar surplus of 1 million tonnes in 2008/09, compared with a surplus of 9.4 million tonnes in 2007/08. Rabobank said market fundamentals would improve, in part because India's current crop was being marked down due to lower yields and a late start to the harvest, resulting from a dispute between millers, Uttar Pradesh authorities, and cane growers.