(c) – By Elizabeth Campbell and Debarati Roy
The record 122 ships awaiting sugar exports at Brazil’s ports and the 3 percent drop in India’s monsoon rainfall show why Colin P. Fenton expects this year’s worst-performing commodity to rise more than gold.

Vessels outside the six main ports in Brazil waiting to load 3.62 million metric tons are being delayed by wet weather, according to Santos Associados Consultoria Ltda. and shipping company Unimar Agenciamentos Maritimos Ltda. Low inventories in India mean any crop short of forecasts will send prices “markedly” higher, said Hussein Allidina, the head of commodities research at Morgan Stanley in New York.

The 1.7 percent rise in demand this year means the ratio of stockpiles to consumption will drop to a two-decade low of 32 percent, International Sugar Organization data show. While a 22 percent gain in July brought prices close to the year-end estimate of 10 analysts surveyed by Bloomberg News last week, bulls say shortages will push sugar higher. The Philippines, India, Pakistan and Indonesia are “virtually out” of reserves, said F.O. Licht, a researcher operating for more than 130 years.

“A bull market has emerged in sugar,” said Fenton, the chief executive officer of Curium Capital Advisors LLC, a Boston-based researcher on global raw materials, and a former commodity analyst at Goldman Sachs Group Inc. He owns exchange- traded notes linked to sugar futures in New York and expects a 28 percent rally by year end to 25 cents a pound.

Sugar traded on ICE Futures U.S. in New York jumped to a four-month high of 19.67 cents on July 29, compared with the average estimate of 19.75 cents by year end. Gold, which reached a record $1,266.50 an ounce in June, will average $1,200 in the fourth quarter, 1.4 percent more than now, according to the median of 18 analyst estimates compiled by Bloomberg.

Rising Sweetener Costs

Another sugar rally may increase costs for Krispy Kreme Doughnuts Inc. and candy makers Hershey Co. and Tootsie Roll Industries Inc. already hurt by prices that doubled last year.

In 2009, sugar rose the most in 35 years as rain damaged crops in Brazil, the biggest producer, and dry weather curbed output in India, the second-largest. The commodity led gains in the United Nations’ Food Price Index, which rose 20 percent. This year, sugar fell 27 percent, the most among 24 commodities in the Standard & Poor’s GSCI Index, as buyers balked at costs and forecasters predicted a surplus after two years of deficits.

All that changed in the last two months.

Marcos Lutz, the chief executive officer at Cosan SA Industria & Comercio, the world’s top cane processor, said on June 17 that output next year in Brazil’s Center South, the largest growing region, may be lower than this year’s 28 million tons.

Export Logjam

Datagro Ltd., the Sao Paulo-based consultant and researcher, cut its forecast on July 23 for total Brazilian production, estimating 37.5 million tons for the year that began April 1 from 38 million. Unica, an industry group, said July 13 it may lower its forecast.

Trucks carrying sugar in Brazil are waiting as long as 40 hours to unload their cargoes at ports, according to C. Czarnikow Sugar Futures Ltd., which has been publishing market reviews since 1873.

The backlog of ships is more than twice last year’s 46 vessels. Ports stop sugar loading to avoid water damage. Latin America’s largest economy ships 54 percent of the world’s sugar exports, up from 20 percent a decade ago, according to the U.S. Department of Agriculture.

Global demand will be 8.5 million tons greater than output of 158.2 million tons this year, according to ISO’s most recent estimates on May 13. The shortage will be made up from inventory forecast to be at 52.8 million tons on Sept. 30, the group says. Next year, production will rise 9 percent to a record 172.5 million tons, creating a 2.5 million-ton surplus, the ISO says.

Brazilian Ports

Toby Cohen, the head of analysis at London-based Czarnikow, said in a report today that the logjam at Brazil’s ports means that the market’s “return to surplus in the 2010-2011 season may be illusory.”

Buying accelerated as prices slipped from a 29-year high of 30.4 cents on Feb. 1 to a 13-month low of 13 cents on May 7, Morgan Stanley’s Allidina said.

Thailand, the second-largest exporter, bought 74,350 tons of domestic supply on July 13, the first such purchase in more than 30 years. Pakistan is allowing traders to import 500,000 tons without duties until Nov. 30. Indonesia will boost buying before the Islamic holy month of Ramadan starts this month, when consumption peaks, said Stefan Uhlenbrock, a senior analyst at F.O. Licht in Ratzeburg, Germany.

Unexpected Supply Limits

“We’ve got some countries where their crops could also be negatively affected by weather, particularly countries like Thailand and China,” said Leonardo Bichara Rocha, the ISO’s senior economist. “Therefore, the surplus may not be as high as people are anticipating.”

India’s monsoon season, the main source of irrigation that runs from June to September, produced 3 percent less rain than average as of Aug. 1, the Indian Meteorological Department said today. The monsoon was 16 percent below normal in June.

“Output will be higher this year, but not the bumper year people think,” said Kyle Tapley, a meteorologist at Rockville, Maryland-based MDA EarthSat.

The Indian Sugar Mills Association said the crop will rise to 25 million tons next year from 18.7 million tons in the season ending Sept. 30. Maryland-based MDA Earthsat forecasts 20 million tons, while Michael Ferrari at Weather Trends International Inc. in Bethlehem, Pennsylvania, said output will be at least 7 percent less than most estimates.

Crops May Recover

There’s time for supplies to recover because the monsoon doesn’t end for another two months. Prices will drop to 13 cents to 14 cents by the end of the year, said Judith Ganes-Chase, a former Merrill Lynch & Co. analyst who runs a consulting firm in Katonah, New York.

“Bumper crops are expected both from Brazil and India, and if they are translated into reality, there will be a global surplus of about 3-5 million tons,” said Claudio Oliveira, a trader at New York-based Castlestone Management LLC., which oversees $500 million, including sugar futures.

Even after last month’s gains, prices would have to more than triple to get to the 66 cents reached in November 1974.

Futures contracts show traders expect little flexibility in supplies. October sugar traded at a 5.2 percent premium to March futures on July 30. In the week ended July 27, speculators increased bets on rising prices to the highest level since April, data from the U.S. Commodity Futures Trading Commission show.

European Dry Spell

The European Union may produce less sugar because of dry weather, according to Lars Hoelgaard, the deputy director general of agriculture and rural development at the Brussels- based European Commission.

Rainfall in northern France, Belgium, the Netherlands and western Germany was 60 percent to 80 percent of normal amounts in the 180 days through July 5, according to forecaster Martell Crop Projections. That includes the main EU sugar-beet regions.

In the U.S., where the government limits imports to protect domestic growers, deliveries are up 3.4 percent in the six months ended March 31, compared with a year earlier, according to The Sugar Association, a Washington-based industry group whose members including Imperial Sugar Co.

Even though the USDA raised its raw-sugar import quota twice this year, the industry needs at least another 300,000 tons of imports to meet demand, said Tom Earley, an economist and vice president at food and agriculture consultant Promar International.

Krispy Kreme, the second-largest U.S. doughnut chain after Dunkin’ Brands Inc.’s Dunkin’ Donuts, increased prices for some products after a jump in sugar and shortening costs.

Chocolate Costs

“The biggest price increase has been sugar,” Douglas R. Muir, chief financial officer of the Winston-Salem, North Carolina-based company, said in a June 3 conference call. “We have substantially higher sugar costs in the system.”

Hershey, based in Hershey, Pennsylvania, incurred a second- quarter pretax charge of $86.2 million that included rising sugar costs. Tootsie Roll, the Chicago-based maker of Charms lollipops, said in a statement that second-quarter profits fell 18 percent and were “significantly impacted by higher ingredient costs, primarily sugar.”

“Sugar is at a critical state in which marginal shifts in supply and/or demand can create parabolic price movement,” said James Dailey, who manages $145 million at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania. “Sugar appears to be excellently positioned to make a run at the mid 1970’s high in the next year or two if there are major supply constraints.”