Sugar high? This commodity could stage a sweet comeback

Kuni Takahashi | Bloomberg | Getty Images

After four consecutive years of annual price declines, 2015 could see sugar stage a sweet comeback.

A slew of supply disruptions have propelled ICE raw sugar prices 36 percent higher to about 14 U.S. cents a pound on Wednesday, up from a seven-year low of 10.44 cents in August, and analysts believe the gains are likely to continue amid sliding output from the world's top producers.

"In India, an early withdrawal of the monsoon and higher ethanol output in Brazil could be disruptive enough to drive the market into a severe deficit, as seen in 2009, when the sugar price rallied 90 percent in just four months," Barclays pointed out in a recent report.

The past few years have been anything but a sugar high for the commodity. Prices have plunged 25 percent over the past two years as countries churned out record production, but fortunes now appear to be changing.

Read MoreSugar far from sweet spot for investors

A milder-than-expected monsoon in India, the world's second-biggest producer, could see its sugar output decline 5 percent this year, as Maharashtra and Uttar Pradesh, key sugar-producing regions, experience rains 20-50 percent below normal. Even though India boasts high inventory levels, Barclays believes a severe drought brought on by the El Nino weather phenomenon could force the country to convert from a sugar exporter to an importer this year.

"Recall that, a drought back in 2009 in India led sugar prices to a 30-year high," according to the bank's note.

Meanwhile, Brazil—the world's largest producer—is ramping up production of ethanol, of which sugarcane is a key ingredient.

Ethanol production increased an annual 4 percent to 28.6 billion liters in 2014 and is expected to hit 44 billion liters by 2024, according to state-run research firm Empresa de Pesquisa Energetica (EPE).

Brazilians are consuming more of the alternative fuel because it's cheaper than gasoline. The real's 44 percent depreciation against the greenback has made crude oil imports more expensive, forcing state-run oil behemoth Petrobras to raise gas prices by 6 percent two weeks ago. Despite being one of South America's top oil producers, the country still needs to import vehicle fuels to meet domestic demand.

In China, the world's fourth largest sugar producer, low profitability is hurting output, Barclays noted.

"Sugarcane farming has turned into a money-losing business since 2014 on rising labor cost and declining average selling prices, leading to farmers rotating to other crops [like eucalyptus, bananas, and vegetables]."

Typhoon Mujigae also leveled plantations in the southern Chinese region of Guangxi, responsible for 63 percent of national production, when it made landfall in early October. With harvesting starting in November, it's too late to replant, Barclays warned.

Read MoreHot chocolate! Behind the big cocoa rally

"Previously, any bullish news about sugar was always taken with a grain of salt since the supply backdrop remained in excess but now there is a real supply disruption, so the price rally should be sustainable," noted Avtar Sandhu, senior commodities manager at Phillip Futures.

He cautions that there's still a chance for the market to end the year with a surplus. But the situation could be revisited in 2016.

"Harvesting season has already arrived for major producers like Brazil and India so these disruptions may not matter much for this year's crop. Next year should definitely see the market in deficit."