This year we've seen sharp price increases in commodities, especially in the weather sensitive agricultural sector. Coffee and sugar are in the spotlight this week.

Processors who buy raw commodities and process them into consumer products are caught is in a price squeeze. On the one hand they must pay more for the raw product and on the other they are up against consumers who are cost conscious.

Sugar prices have been on a roller coaster this year. During the middle of the year, rumors were rampant that supply was tight. Prices more than doubled.

Then rumors spread that there would be a surplus of sugar this year and prices had a sharp sell off. Now the latest guesstimate is that sugar demand will exceed supply in the marketing year ending September 30. As reported in Bloomberg/Businessweek, analysts for ABN Amro and VM Group forecast that demand will reach 165.3 million metric tons, more than 3 million tons more than supply.

The gold market exploded Thursday with the December contract up $45.50 to $1,383.10 per ounce, as reported in the Wall Street Journal.

As usual, there are lots of reasons for the spectacular rise. The two main ones are currency worries and inflation.

Let's take the currency issue first. The December U.S. dollar contract is hovering just above the 75 level. That level held and the dollar then rose to 89.11. Now it has come back down to the 75 level. A breach of 75 would signal a further move down.

First we had record cotton prices due to crop shortages. Now we have the same situation in the the sugar market.

The big producers of sugar are Brazil and India. Brazil dominates the market with half of the world's exports. The country has experienced a smaller-than-normal harvest. Inventories are at their lowest levels in decades. Unica, the country's cane industry association, said that production was down 30% in the first half of October from 2009, as reported by the Financial Times.

Yes, you can expect to pay more for your cup of coffee. Supplies of prized Arabica beans are in short supply, driving prices to a 12-year high. Prices for December delivery jumped 3% to $1.852 per pound. Retail prices can be more than double that price.

J.M. Smucker (SJM), distributor of Dunkin Donuts, Millstone and Folgers, already raise prices by 9%. Kona Haque, commodities analyst for Macquarie, was quoted in the Financial Times, saying: "The coffee futures market had attracted speculative buying. It's completely dominated by funds right now."

A few weeks ago, we heard reports that sugar prices would rise because of weather conditions and supply/demand factors. Sugar prices recently hit a 28-year high, trading at 23 cents per pound.

New data suggests that sugar prices may drop as much as 24%, according to Craig Ruffolo of McKeany Falvel company. He says that markets are already anticipating lower prices well before the next Brazilian harvest.

Cosan (NYSE: CZZ), an ethanol and sugar company, closed at $7.99. Sugar prices are near a 28-year high. CZZ call option volume of 2,974 contracts compares to put volume of 274 contracts. CZZ September option implied volatility is at 82, December is at 77; below its 26-week average of 98, according to Track Data, suggesting decreasing price movement.

Imperial Sugar (NASDAQ: IPSU) closed at $14.60. IPSU September option implied volatility is at 65, October is at 64 and January is at 61; below its 26-week average of 70, according to Track Data, suggesting decreasing price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Like oil, sugar is an international commodity. Unlike oil, sugar is an agricultural crop dependent on the weather. This year has seen droughts in some parts of the world and wetter than normal weather in other parts of the world where sugar is grown. Both extremes affect the growth of sugar cane.

Here are some reports from various sugar-growing countries:

• India is both the largest exporter and importer of sugar. This year India will be an importer of sugar. India's inventories will fall 50% to 4.54 million tons, equal to three months consumption. Reports from farmers indicate that plants are only one foot high compared with normal growth of five feet. Rainfall was 64% below normal in the growing regions. To fill the gap, the Indian government is extending duty free imports.