Brazilian cane-grower Jose Rodolfo Penatti can see evidence from his house window that the world is heading for its first sugar-production deficit in four years.

On the 150 acres his family has farmed in Sao Paulo state since the 1950s, stalks are half the normal height of more than three meters (9.8 feet) and brown rather than green, after a drought from January through March parched the Center South region. “It’s the worst scenario I’ve ever seen,” said Penatti, 54, who estimates he’ll lose 20 percent of his harvest.

The smaller crop in Brazil, the largest grower and exporter, will leave global sugar output 900,000 metric tons below demand in the 12 months ending Sept. 30, and the shortfall may be bigger next year, said Bruno Lima, a senior risk-management consultant at FCStone do Brasil. Copersucar SA, a trader, predicts raw-sugar futures will jump 14 percent by year end to 20 cents a pound. An extended rally may boost costs for buyers including Nestle SA while reviving profit for refiners after four years of surpluses forced dozens to close.

“The deficit has taken the market by surprise,” Peter Sorrentino, who helps manage about $3.8 billion at Huntington Asset Advisors in Cincinnati, said in a telephone interview yesterday. “It doesn’t take much variation on weather to have significant changes in harvest projections. The market has been down for so long, investors and the industry are also reacting to potential loss in capacity.”

Price Rally

Raw sugar has advanced 13 percent since the end of January to 17.58 cents today on ICE Futures U.S. in New York, outpacing the 5.1 percent gain in the Standard & Poor’s GSCI gauge of 24 commodities. The MSCI All-Country World index of equities rose 5.5 percent over the same period, while the Bloomberg Treasury Bond Index increased 1.3 percent.

Brazil, which accounted for 28 percent of global output last year and 57 percent of exports, had its driest summer in at least seven decades in the Center South region, damaging tropical crops including sugar cane, coffee and oranges. Arabica-coffee futures surged 68 percent this year, touching a 26-month high in April, and orange-juice futures rose 12 percent.

From December through February, rainfall in Sao Paulo was as little as 25 percent of normal, limiting plant growth and eroding yields, said Drew Lerner, the president of the Overland Park, Kansas-based forecaster World Weather Inc.

Cane output in the Center South, which accounts for about 90 percent of Brazil’s total, may drop as much as 5.2 percent to 565 million tons, according to Julio Maria Borges, head of Sao Paulo-based consultant JOB Economia & Planejamento.

Extending Deficit

Global demand will reach a record 167.6 million tons in the year ending Sept. 30, extending two decades of increases that saw consumption surge 48 percent, U.S. Department of Agriculture data show. In the 2014-2015 season that starts Oct. 1, demand may outstrip harvests by as much as 3 million tons, according to Sao Paulo-based Copersucar.

Producers in Brazil, Mexico and China have seen reduced incentives to boost output after prices tumbled as much as 59 percent from a 30-year high in February 2011 to this year’s low in January, and as refining costs increased, according to Jonathan Kingsman, founder of Kingsman SA, a unit of McGraw Hill Financial Inc.’s Platts. Since 2010, at least 44 Brazilian mills closed, said Norberto Zaiet, a vice president at Sao Paulo-based Banco Pine.

Surplus Sugar

Ample inventories may keep prices in check. Even with record demand, global stockpiles at the end of September will reach 43.38 million tons, the most ever, according to the USDA. Buyers with enough sugar to meet their needs may curb purchases.

Supplies are rising outside of Brazil. Thailand, the second-largest exporter, saw output jump 13 percent in the season that began Nov. 25, the Office of Cane and Sugar Board said May 7.

“We still have ample inventories,” Ivan Melo Filho, commercial director at Raizen, said in an interview in New York May 13. “That could limit the upside.”

Money managers are getting more bullish, with a net-long position on May 13 of 135,016 futures and options contracts, the most since Nov. 19, Commodity Futures Trading Commission data show. As recently as Feb. 18, hedge funds and other large speculators were bearish, with a net-short position of 26,489 contracts.

“With rising expectations for an El Niño weather pattern developing, the risks to our medium-term forecasts are skewed to the upside,” analysts at Goldman Sachs Group Inc., led by Jeffrey Currie, said in a report dated May 13.

Cane Ethanol

Supplies may tighten further as more cane is used to make fuel, which offers better returns as domestic demand and prices increase. As much as 58 percent of Brazil’s crop will be converted to ethanol, according to Raizen, a joint venture of Royal Dutch Shell Plc and Cosan SA. That would be the highest rate in five years, according to Unica, an industry group.

On the farm in Piracicaba, about 160 kilometers (100 miles) northwest of Sao Paulo, Penatti said he’ll be lucky to collect 10,000 tons of cane from the harvest that started this month, compared with 12,500 tons last year.

(By Marvin G. Perez and Mario Sergio Lima)