By Lara Crigger
Last week, sugar hit a staggering 28-year high, with the October contract topping 23.33 cents/lb in New York: Although sugar's still way off its record high of 66 cents/lb (set back in 1974), the commodity is still up 88% year-to-date.

The rise has been spectacular, but some analysts think sugar's future looks even sweeter. Take Jim Rogers, who told Bloomberg earlier this month that "sugar is certainly going to go much, much higher during the course of the bull market."

Bad Rains Rising
So what's behind the sugar spike? Turns out that abnormal weather patterns have dampened harvests - literally. Rain - both too much and not enough - has been the main culprit behind prolonged sugar shortages.

In Brazil, the world's largest sugar producer, the skies are looking downright biblical: Some fields have been drenched by as much as four times the normal amount of rainfall.

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On the other side of the globe, however, next-largest producer India has suffered an exceptionally wimpy monsoon season - this past June was the driest in 83 years. And although recent rainfall suggests the drought may be ending, with analysts raising their output forecasts as much as 20%, the season's precipitation levels could still be 87% below the norm, forecasted the India Meteorological Department.

That's not just bad news for Indian farmers. India is also the world's largest consumer of sugar, accounting for 24.3 million tons in 2008 - that's about 15% of the world's demand. The drought at home is so bad, say some analysts, that it could turn India from the world's largest sugar exporter into the world's largest importer.

However, India isn't alone in sugar withdrawal. "You have pent-up demand in many countries," said Cyrus Raja of Al Khaleej to Bloomberg. "It's not just India. Other countries are also facing shortages."

That includes China, the world's third-largest producer, whose next harvest will be smaller due to reduced planting; and Russia, who will import an added 2 million tons after its crop was hard hit by hail storms and drought. Even Mexico is feeling the squeeze. After an 11% drop in harvest yield, the country may import up to 393,000 tons through the end of the year.

Of course, if everyone's importing sugar, who exactly will they import it from? Answer: Australia. The world's third-largest sugar exporter could lift its output by as much as 250,000 tons next year; crop acreage is expected to rise 5%.

Still, the crunch has gotten so bad that the International Sugar Organization has predicted global demand to outstrip supply by as much as 5 million metric tons through September 2010. Such dire predictions have incited a public freakout at the U.S.' major food manufacturers, including General Mills (NYSE: GIS), Kraft Foods (NYSE: KFT) and Hershey Co (NYSE: HSY).

Earlier in the month, these companies and others sent a joint letter to Agriculture Secretary Tom Vilsack, reminding him that federal estimates suggest the U.S. will end next year with less than 13 days' worth of sugar in its stockpile.

"If this forecast is accurate, we may well virtually run out of sugar," they wrote. The companies hope to convince the government to ease import restrictions, which, in an effort to support local farmers, currently keep sugar's domestic price tag about twice as high as the global one. Domestic sugar producers counter that increasing sugar imports won't be cost-effective, as freight costs would inevitably drive prices higher anyway. Increased import quotas, they say, would depress sugar prices below the cost of production and drive them out of business.

The Next Sugar Spike?
Where does sugar go next? Analysts differ widely. Some optimists share the view of Michael Coleman, a manager of commodities hedge funds, who argues sugar could climb another 80% to top 40 cents/lb.

"Sugar is caught in a perfect storm," he told Bloomberg TV. "From this point on, it depends on how price affects demand."
But according to Peter Baron, executive director of the International Sugar Organization, 40 cents/lb is "wishful thinking," since higher prices will decelerate import buying.

"People are much more cautious when they face prices which are in the clouds," he said, adding that exorbitant prices would compel food producers to use alternatives, like corn syrups.

Indeed, a good number of traders are now eyeing the market with caution. "The markets are technically overbought," Nick Penney, a London-based trader, told Bloomberg last week, "but this is not dissuading new buyers from entering it."

Playing the sugar rush
Still, if you want in on the sugar rush, you have plenty of options available to you. The purest play is, of course, sugar futures, which are available on ICE in 112,000 pound contracts. The No. 11 contract trades global raw sugar, while the No. 16 contract trades the U.S. market.

Also, if food makers do switch over to corn-based sweeteners based on higher prices, it might be worth it to keep an eye on corn as well. Corn futures are sold on the CBOT, in contract sizes of 5,000 bushels.

Investors seeking an exchange-traded play on sugar can check out the futures-based iPath Dow Jones AIG Sugar Total Return Sub-Index ETN (NYSE Arca: SGG). Year-to-date, SGG is up 62%, and lately has been one of the better performers in our Breakfast Index.

Other sugar-related (although more broadly based) exchange-traded vehicles include the PowerShares DB Agriculture Fund (NYSE Arca: DBA), which tracks futures in corn, soybeans, wheat and sugar; and the ELEMENTS Rogers International Commodity Agriculture ETN (NYSE Arca: RJA), which tracks 20 futures contracts worldwide.
(Courtesy: Hardassetsinvestor.com)