Raw sugar futures prices of 13-14 cents a pound are "sustainable into 2016", Australia & New Zealand Bank said, as the market continues to probe the sustainability of a rally of more than 20%.
The bank cited a read through from values of ethanol, which competes with sugar for cane in the key Brazilian market, for an assessment that while there may be some scope for price retreat, it is limited.
Ethanol prices have been boosted by factors including an increase in Brazil's mandated blend rate of the biofuel into gasoline, and a rise in domestic gasoline prices, which lifts values of alternative fuels too.
This has driven higher values of sugar, to avoid the sweetener being deprioritised further by mills, which have allocated their lowest proportion of cane to sugar in seven years.
"This low allocation of cane to sugar production has left nearly a 2m-tonne shortfall in Brazil's Centre South sugar production to last year," said Paul Deane, senior agricultural economist at ANZ.
'Need for repricing'
Prospects for sugar output in Brazil, the top producer and exporter of the sweetener, have been made even more precarious by rains which have slowed cane harvesting in the Centre South district, responsible for some 90% of domestic volumes.
"As the risk of the early close to Brazil's 2015 [cane] harvest increases with wet weather, so too has the need for sugar to reprice itself more competitively to ethanol," Mr Deane said.
"Part of the sugar price rally in October was repricing relative to ethanol, so mill revenue from sugar production was more attractive."
The bank underlined that some ancillary support to sugar prices could yet give way, with the recovery in the Brazilian real, for instance, at risk of reversal "should the [currency market] focus return to the economic fundamentals of emerging economies".
A weak real undermines the value, in dollar terms, of assets such as sugar in which Brazil is a major force.
Also, the build-up by hedge funds of net long positions in raw sugar derivatives is prone to reversal, given that it has reached levels which, according to ANZ, are the highest in two years when compared with open interest – ie the number of total live contracts in the sweetener.
Furthermore, the rain slowing the cane harvest this year could herald a bigger crop in 2016-17, with consultancy Agroconsult forecasting a harvest of 630m tonnes, a record high and up some 5% on that expected this season.
Nonetheless, the ethanol support to sugar prices is "likely to persist".
And assuming a stable real, "pricing off Brazil's ethanol market indicates that a 13-14 cents-a-pound price for raw sugar is sustainable into 2016", Mr Deane said, adding that this equated to a value in Australia of Aus$465 a tonne.
The comments come ahead of data expected later on Tuesday from cane industry group Unica on the progress of the Centre South harvest in the second half of October.
The report is expected to show cane harvesting of 37.9m tonnes during the period and sugar output of 2.14m tonnes, with the sweetener accounting for 43.1% of cane crushed, according to a Platts survey of analysts.
Flash in the pan?
The market is also debating the sustainability of a rally which has driven New York's March 2016 raw sugar futures contract from a close of 11.55 cents a pound on September 23 to 14.12 cents a pound on Tuesday, a gain of 22%.
However, the contract remains well below a high of 15.53 cents a pound reached a week ago.
Broker Sucden Financial said: "The question remains: is this a timely correction, or was the break-out to the upside a false move?"
The failure of the physical sugar market to show the same buoyancy as futures is one factor also raising alarm bells.
"Activity in the physical markets has not noticeably picked up and end-users have seemingly taken the rise [in futures] with a pinch of salt, or are still well-supplied," Sucden said.
"The markets need to settle into a range before persuading buyers that the overall trend has changed for the long haul."