The International Sugar Organisation (ISO) expects a global sugar deficit, estimated at just under 1 million tonnes for this year, to disappear in the year 2006/07, as production increases.
"The early indications are that (2006/07) could be a pretty well-balanced year. The deficit phase is over for the market," ISO senior economist Sergey Gudoshnikov told Reuters on the sidelines of a sugar conference in Istanbul.
But he said stocks, which have fallen in recent years, would not be rebuilt quickly.
"Although we don't expect a big deficit for this year and no deficit for next year, still we expect stocks to be low. We can't see any kind of stock building on the horizon," he said.
Raw sugar prices have hit 25-year highs this year, as investment funds move into commodities and demand outpaces supply. Sugar prices have also been driven by an increase in demand for ethanol as a fuel, boosted by soaring international oil prices, which make gasoline substitution more attractive.
ISO Executive Director Peter Baron told Reuters he expected raw sugar prices, which for July delivery traded at 16.39 cents in New York on Tuesday, to remain high.
"We think that the short to middle term outlook is very positive and we think that the prices will keep at a level between 15 to 20 cents for quite some time," he said.
Part of the rise in consumption will come from demand for car fuel substitute ethanol, and the United States, which makes its own biofuel from corn, is expected to start needing heftier ethanol imports.
Leading sugar producer Brazil, which has added 19 new mills this year, is expected to split its output this year evenly between sugar and ethanol. But by 2010 or 2011, competition will intensify, and 58 percent will go to ethanol production, ISO senior economist Leonardo Bichara Rocha said.
The South American commodities giant has pioneered filling car tanks with sugar-based fuel substitutes and data earlier this year showed more than 70 percent of new cars sold were flex-fuel.
Brazilian sugar makers are stepping up production to face the increased demand and 90 new mills are forecast to be added to a current 344 by 2010, Brazil's General Co-ordinator for Sugar and Ethanol Affairs Alexandre Betinardi Strapasson said.