Sugar may gain as Brazil targets ethanol production

July 26 | Updated: Jul 27 2006, 05:30am hrs
Raw sugar futures in New York may rise over the next month as Brazil, the worlds biggest producer of the sweetener, devotes more of its crop to make ethanol, an alternative fuel made from cane.

The prices may gain to 17 cents a pound driven by the Brazilian switch, M Somasekhar, an analyst at TransGraph Consulting Pvt, which advises traders, said on Tuesday. Raw sugar futures on the New York Board of Trade, up 54% over the past year, closed at 15.31 cents on Tuesday.

Governments and companies are showing greater interest in bio-fuels after crude prices tripled since 2002. Brazil is diverting more than 50% of its cane crop to make ethanol, Vikram Suryavanshi, an analyst with Mumbai-based Karvy Stock Broking Ltd, said in a report on July 7.

Rising oil prices have increased demand for alternate fuels such as sugar-based ethanol, which can be mixed with gasoline to cut fuel costs, Somasekhar said. This will continue to keep sugar prices at higher levels.

Raw sugar futures, which peaked at 66 cents a pound in 1974, have averaged 16.7 cents a pound so far this year compared with 10 cents in 2005.

Brazils ethanol output may rise 4.4% to 16.7 billion liters this year, Somasekhar said from Hyderabad. Hes been forecasting prices of commodities, including sugar, for the last three-and-a-half years.

Brazil raised its estimate for the sugar cane crop for 2006 to 446 million metric tonne, the government statistics agency IBGE said on its web site in June. The forecast is up from 445.1 million tonne estimated in May, and from the harvest of 422.9 million tonne last year.

Global demand for sugar may rise 1.1% to 145.7 million tonne in the year ending September 30 from a year earlier, Ratzeburg, Germany-based F.O. Licht said on July 14.

Sugar prices may also rise as production in Australia, the worlds third-biggest exporter of the commodity, may fall 4% to 4.9 million tonne after a cyclone in March and the discovery of cases of smut, Somasekhar said. The wind-borne disease stunts cane growth.

Other analysts have been backing sugar prices to rise. The ethanol angle has given a strong boost to prices, Sudakshina Unnikrishnan, an analyst with Barclays Capital in London, said on June 15.

Raw sugar futures in New York may average 19 cents a pound in the final quarter, Barclays said.