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By Bloomberg

Global sugar production may trail demand for a second consecutive year as the lowest prices since 2010 spur consumers to buy more, according to F.O. Licht GmbH.

Demand is set to climb 2 percent in the 12 months starting October this year while output won’t increase in Brazil, the world’s biggest supplier, and is likely to shrink in the European Union, said Stefan Uhlenbrock, senior analyst at the Ratzeburg, Germany-based researcher. A shortage may result after a 1.1 million metric ton deficit this season, he said.

“There is a likelihood that the deficit will persist because Brazil will probably not produce more sugar next season and the EU will probably produce much less,” Uhlenbrock said by phone on Tuesday before the company’s conference in Bangkok. F.O. Licht is raising its estimate of a shortage this year from 600,000 tons because of lower Chinese production, he said.

Raw sugar futures fell to 14.07 cents a pound on Jan. 5, the lowest since June 2010, on expanding global stockpiles. Inventories were 43.6 million tons at the end of 2013-2014, the largest since at least 1960, according to the U.S. Department of Agriculture. Prices settled at 14.69 cents on ICE Futures U.S. in New York on Tuesday.

“There might be a moderate price increase but statistically speaking there is still more than enough sugar around to satisfy all needs,” Christoph Berg, managing director of F.O. Licht, said in an interview. “Consumption is strong and healthy.”

Brazil, Europe

Shortages are already forecast by Green Pool Commodity Specialists Pty and Kingsman SA for 2015-2016. Green Pool has estimated the deficit at 5.02 million tons and Kingsman has forecast a shortfall of 5.2 million tons.

Sugar output in Brazil is unlikely to expand next season even as the cane harvest increases because of government incentives to boost ethanol production, Uhlenbrock said. Cane is used for sugar and ethanol in Brazil.

The government has agreed to increase the ethanol blend in gasoline to 27 percent from 25 percent, according to the Brazilian Sugarcane Industry Association, also called Unica. Last month, the government said it will raise taxes on gasoline, which can be substituted with ethanol in flex-fuel cars.

“Falling sugar prices and increased gasoline taxes should lift Brazilian hydrous ethanol demand to five-year highs, reducing sugar’s share of total recoverable sugars to a seven- year low of 42 percent,” Morgan Stanley analysts including Bennett Meier and Lee Jackson wrote in a report dated Feb. 9.

Production in the European Union may drop as farmers reduce planting, Uhlenbrock said. China will probably produce 10.6 million tons this crop year, less than a previous estimate of 12 million tons and below 13.3 million tons a year earlier, he said. Brazil’s production in 2014-2015 is seen at 35.5 million tons while India may harvest 26 million tons, he said.