The sugar market is set to turn bullish as four years of declining prices curb production, worsening shortages through 2017-2018, commodity trader Group Sopex said.

World output will expand 1.8 percent to 183.2 million metric tons in three years, while demand will grow 7.9 percent to 194.7 million tons, widening the gap to 11.5 million tons, said analyst John Stansfield, who has studied sugar for two decades. He expects a deficit of about 700,000 tons this season, the first since 2010-2011.

Futures slumped to a four-year low last month after global reserves climbed to a record. The trend may be turning, with Kingsman and Green Pool Commodity Specialists also forecasting shortages next year. Morgan Stanley and Rabobank International predict prices will increase on reduced planting and higher ethanol output in Brazil, the top sugar supplier.

"We definitely appear to have found the bottom of the market," said Stansfield, a former analyst at Vitol Services and Olam International. "We expect the market will be bullish in the next three to four months," he said in an interview in Bangkok on Wednesday.

Futures in New York fell in the past four years, the longest stretch of declines since at least 1962, and touched 14.07 cents a pound on Jan. 5, the lowest since June 2010. Prices settled at 14.91 cents on ICE Futures US on Thursday.

The increase in prices may be limited by record global inventories. Stockpiles climbed 46 percent in five years to reach 43.6 million tons at the end of 2013-2014, the highest since at least 1960, US Department of Agriculture data show.

"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 on Tuesday.

"This sugar mountain stands in the way of an imminent price recovery."

The contract for March delivery traded on Thursday at a premium of 0.13 cent to May futures from a discount of 0.4 cent at the end of last year. That shows investors expect physical supplies to decline, especially from Brazil, Stansfield said.

"The front-end of the sugar curve is inverting to draw forward supply, showing the market is in transition from surplus to deficit," he said. "Without a clear signal that Brazil is going to expand, the market will move into a greater deficit moving forward."

Stansfield predicts the global shortfall will widen to 6.6 million tons next season and to 11.2 million tons the year after. F.O. Licht is increasing its estimate for the deficit this year to 1.1 million tons from 600,000 tons and expects another shortage in 2015-2016. Green Pool predicts the gap next year at 5.02 million tons and Kingsman sees 5.2 million tons.

The market will have a 1.8 million-ton deficit this season, pushing prices to 17.5 cents in the fourth quarter, Rabobank analysts including Tracey Allen said in a report e-mailed on Jan. 22. Futures will average 18.20 cents in the last three months, Morgan Stanley analysts including Bennett Meier wrote in a report on Monday.

Brazil won't see an increase in cane output and factories are closing because of financial problems, Stansfield said. "At 14 cents you're below the cost of production in most countries," so the rate of expansion will slow, he said.

Stansfield said one supplier where sowing could expand is Thailand, the world's second-largest exporter, because the government is encouraging farmers to boost cane production.

Bloomberg