Brazil ethanol to set world sugar price floor

By Reese Ewing

SAO PAULO (Reuters) - Brazilian cane mills are currently earning more from ethanol sales than sugar, and international sugar buyers will have to match or better the price of the biofuel if they want spare product later this year, economist Plinio Nastari said on Monday.

Nastari, the president of Datagro consultants who spoke at the Reuters Global Agriculture and Biofuel Summit in Sao Paulo, said global sugar prices will correct in 2008 as the world turns to Brazil to cover the expected fall in India's sugar output in 2008/09.

"World sugar prices will correct later this year to at least FOB ethanol prices (in Brazil)," Nastari said.

He estimated that free-on-board ethanol prices were currently being quoted at prices equivalent to sugar at 12.1 cents/lb. The ICE March sugar contract traded at 11.5 cents a pound on Monday after a surge that began in early December. Through November, prices had languish below 10 cents.

"In the short-term, India's sugar production will fall by 8 million tons later in 2008," Nastari said. "At that time the world will start turning back to Brazil as its marginal sugar supplier and mills will start adjusting their mix to make more sugar, but only once prices have improved."

India nearly matched Brazil as the world's largest sugar producer this season and is exporting its surplus sugar, taking market share away from Brazil, which supplies about 40 percent of the world's international sugar market. But Indian overproduction hurt many of its producers, who will cut back next crop.

The large Indian crop took the wind out of international sugar prices that were trading at a high of nearly 20 cents a pound in New York in early 2007. But Nastari cautioned against expectations that this level of price would return.

"There are forecasts out there that sugar will return to 15 cents but it's crazy to assume that could hold for any length of time. The elasticity of production in Brazil's cane sector is immense," he said about the ability of local mills to expand sugar output rapidly under the promise of good returns.

Nastari said that cane mills in Brazil had used 55 percent of their crop for ethanol in the harvest that ended just weeks ago, with the remaining 45 percent going to sugar production. This compares with a near 50-50 mix from the previous crop.

"In the second half of 2008, we should see a return to favoring sugar in the mix," Nastari said. "But in the long run, demand for ethanol will be the driving force behind Brazil's expansion in sugarcane production."

He estimated that by 2014, 62 percent of Brazil's cane would go to ethanol and 38 percent to sugar.

Nastari predicted that in the long run, Russia will cease being the leading world importer of sugar; Europe will take over that position but import from Africa and not Brazil; India will likely continue exploit its potential to export.

"The hope is that Brazil will simply be able to maintain its 40 percent market share of the international sugar market," said Nastari. "We have entered the age when ethanol will be the driving force behind Brazilian cane expansion after decades of sugar carrying the sector."

(Editing by Christian Wiessner)