Sugar, Spared by Drought, May Get Cheaper Unlike 'Breakfast Club'

Sugar prices may soften over the course of this year, breaking ranks with the rest of the commodity market's"Breakfast Club" of corn, wheat, soybeans and cocoa, which surged to multi-month and all-time highs as dry weather ravaged crops.

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Standard Charteredcut quarterly price forecasts for benchmark sugar prices on Wednesday after concerns receded over supply from Brazil, but warned upside risks remained for 2013.

The bank lowered its average sugar price forecasts to 21 U.S. cents a pound for the third quarter, from 23 cents previously and 22 cents a pound for the fourth quarter from 24 cents. It estimates the 2012 annual average at 22 cents from 23 cents earlier.

Raw sugar futures traded on the IntercontinentalExchange (ICE) made their biggest two-day tumble in three months on Wednesday, with dealers focused on a global surplus of the sweetener and on the progress of the harvest in Brazil, Reuters reported.

ICE October raw sugar futures fell 0.48 cents, or 2.5 percent, to end at 18.96 cents a pound, drifting towards a two-year low of 18.81 cents touched on September 6. The move lower extends the previous session's losses, causing the contract to drop 5.3 percent in the past two days, the biggest two-day fall since June 22. "We recognize that sugar's support near 18-20 cents a pound appears vulnerable, partly due to the depreciation of the Brazilian real," wrote Abah Ofon, Senior Soft Commodity Analyst at Standard Chartered Bank in Singapore.

In May, analysts at the emerging market-focused bank believed the negative trend in the sugar market at the time would be short-lived due to supply problems reported from Brazil, the world's top producer of the sweetener. Standard Chartered recommended long positions, or bullish bets, in October 2012 ICE sugar contract in anticipation of a rebound towards the 25-28 cents a pound level.

Initially, the market did move higher reflecting uncertainty over the outlook for Brazilian productionin the second quarter. "Heavy rains adversely delayed crushing and dented the sucrose content of the cane," Standard Chartered's Ofon said. "This created bottlenecks in the supply chain at a time when output from that region is usually buoyant."

But Brazil's supply picture has changed for the better since then, offering the prospect of some relief in prices and prompting Standard Chartered to revise their price forecasts. "Since mid-July, the pace of cane crushing has been brisk, and in third quarter 2012, it exceeded the historic average. This, in addition to expectations of higher cane volume and a moderately larger sugar output in Brazil, has alleviated market fears of a supply squeeze," the bank said.

Yet despite bearish developments, "the market still needs to price for risk as output remains uncertain in a number of key trading countries, including China, India and Thailand...our 2012 and 2013 forecasts are still 8 percent and 19 percent higher than the implied futures curve, respectively, underpinning our view that the market is still too bearish," Ofon wrote.

- by CNBC's Sri Jegarajah