June 23 (Bloomberg) -- Sugar jumped to the highest price since July 2006 on signs that a production deficit may extend into a second year and as a weaker dollar increased the appeal of commodities traded in New York.

Output in Australia may trail an earlier estimate by 3.1 percent, the government in Canberra said today. A lull in the Indian monsoon “caused some moisture stress” in crops including cane, according to Krishna Reddy, a Way2Wealth Commodities Ltd. analyst. The U.S. Dollar Index, a six-currency gauge of the greenback’s value, fell as much as 1.3 percent.

“The fundamental backdrop is positive,” said Sudakshina Unnikrishnan, a Barclays Capital commodities analyst in London. “You have projections for a deficit for the upcoming marketing year. You had Australia revising downward. You’ve seen a bit of concern over the delays in the Indian monsoon and the impact this may have on upcoming production.”

Raw-sugar futures for October delivery rose 0.74 cent, or 4.6 percent, to 16.98 cents a pound on ICE Futures U.S. in New York. The price earlier reached 17 cents, the highest for a most-active contract since July 7, 2006.

World demand may top output by as much as 2.5 million metric tons in the year starting Oct. 1, after touching 4.7 million tons in the current marketing year, broker FCStone Group Inc. said on June 18.

Australia Outlook

Sugar production in Australia may be 4.425 million tons for the 2009-2010 marketing year, the country’s Bureau of Agricultural & Resource Economics said, down from its earlier projection. Australia is the world’s third-largest sugar exporter, behind Brazil and Thailand.

India’s monsoon, which runs from June to September, resumed on June 21 after a dry period that began on June 7. The monsoon moved to more parts of the nation’s main cane-growing areas, according to the India Meteorological Department.

Most-active sugar futures gained 44 percent this year as a drop in output turned India into a net importer of the sweetener for the first time in three years. The country is the world’s largest consumer of the sweetener and biggest producer after Brazil.

India may import as much as 3 million tons of sugar in the year ending Sept. 30, S.L. Jain, director general of the Indian Sugar Mills Association, said on June 17. Output in India may fall to as little as 14.6 million tons in the current season, down from 26.4 million tons last year, Vimal Jain, the association secretary, said today.

Monsoon Lull

The lull in the monsoon has put a “bit of a question mark about how much of a rebound will take place” in India’s production in the 2009-2010 marketing year, Barclay’s Unnikrishnan said.

The global production deficit will be felt most in the fourth quarter, said Jeff Bauml, a senior vice president for R.J. O’Brien & Associates in New York.

Ahead of that, investors are increasing stakes in sugar, Bauml said. He added that pre-existing orders to purchase a security that’s increasing in value after it hits a certain price bolstered the rally in sugar.

“The hedge-fund money is going into October” futures, he said. “Once there is upward momentum, everyone joins in.”

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net.

Last Updated: June 23, 2009 15:57 EDT