This year has been anything but sweet for commodities investors. Since peaking in mid-July, the Reuters-CRB Index has crashed a cumulative 48% with every constituent of the index down sharply – except sugar.

To be sure, another formidable commodity is also holding up relatively well in the Panic of 2008 -- gold. Though down 2% this year that’s far better than just about every other asset class where losses exceed 30%.

Sugar prices have rallied 11% in 2008 on the heels of growing supply shortages.

Since peaking in March at $0.15 cents per pound, world sugar prices have indeed corrected to $0.12 cents now but remain higher since January 1st.

The International Sugar Organization is forecasting that global sugar production will decline 3.8% to 162.3 million tons in the year ending September 30, 2009 while consumption is projected to rise 2.4% to 165.9 million tons. This leaves sugar supplies in net deficit and the shortfall is likely to persist for several years, according to industry experts.

The European Union and Brazil are primary factors causing the shortfall in sugar stocks.

European Union (EU) farmers recently renounced a significant amount of their quotas, resulting in lower output this year and into 2009.

In Brazil, where ethanol consumes a fairly sizable chunk of the country’s production, spare capacity is finding its way to ethanol, not edible consumption vis-à-vis exports.

Brazil is also confronting another crisis affecting global farmers – a credit crunch.

Sugar farmers in Brazil are now in the midst of serious financing problems as revolving bank credit it shut or interest rates have increased to levels that prohibit margin expansion for growers. It’s the same phenomenon occurring in the United States as farmers continue to feel the credit squeeze, canceling orders for farm equipment, delaying expansion plans and being decimated by the plunge in grain and most other agricultural prices since July.

Sugar isn’t the only commodity that’s in or approaching supply deficit. Coffee and cocoa also remain very tight, especially the latter amid unrest in the Ivory Coast – the world’s largest cocoa producer.

Once global markets finally calm down or, at least, stop gyrating violently, I expect the fundamentals to return to the commodity complex. Supplies are declining for several commodities, namely gold, silver, sugar, coffee, cocoa and rhodium. The grains, particularly wheat and corn, are also poised for another big move.

It’s definitely time to start looking at raw materials again following a 50% crash since July. I also think the sector will get help from a weaker dollar ahead of a 0% Federal Funds rate over the next 3-6 months as the United States desperately tries to conquer deflation in the economy.

My favorite commodities now include gold, silver, sugar and the grains. Supply imbalances continue to work in their favor.