World sugar prices are likely to defy gravity in the next 12 months as key producing countries churn out ethanol as an alternative fuel after oil prices spiked to stratospheric highs.

We need more sugar and at the same time we need much more ethanol, Peter Baron, executive director of the International Sugar Organization (ISO), told Reuters at a conference in Manila.

If you look around the world, in many, many countries they have already programmes and legislation to mandate a mixture of gasoline with ethanol.

Crude oil prices hit a record high of $75 per barrel in April and that will tempt sugar growers like top producer Brazil to funnel more cane into ethanol.

The U.S. is expected to need more of the biofuel this year as it switches from using the water-polluting additive MTBE to ethanol to mix with gasoline.

U.S. ethanol is made from corn, but the other major source is Brazil's cane-based fuel.

If crude oil remains high, sugar prices will not be far behind, said James Ledesma, administrator of the Philippines' Sugar Regulatory Administration.

Raw sugar prices, which rose over 60 percent last year, surged to a 25-year high of 19.73 cents per lb in February. ISO senior economist Lindsay Jolly said he expected world prices to trade at between 15 and 18 cents on the New York Board of Trade over the next 12 months, despite hopes of improved cane harvests from Brazil and other major producers such as Thailand and India.

The benchmark July raw sugar contract in New York settled on Wednesday at 17.12 cents a lb.


The recent rally in sugar has been fueled by Brazil's plan to use more cane to produce ethanol and on the back of heavy buying by investment funds pouring into the commodities sector.

That typical supply-demand balance is only one of the drivers now. You have to think of what the oil price is doing and the link to Brazil and its ethanol allocation versus its sugar allocation, Jolly told reporters in Manila.

Brazil's closely watched ethanol-sugar split in the 2006/2007 crop year is likely to be nearly level, Angelo Bressan Filho, director at Brazil's Department of Sugarcane and Agrienergy, told Reuters.

Private analysts Datagro projected Brazil's sugar cane output in the 2006/2007 crop year (May/November) to rise to 415 million tonnes, from 383.7 million in the previous season, Filho said.

For 2006/2007, Datagro estimates that 49.7 percent, or 206.2 million tonnes, will be used to make ethanol and the remaining 50.3 percent or 208.8 million tonnes, for sugar, he said.

In the previous season, Brazil's ethanol-sugar ratio was 50.7 percent-49.3 percent or 194.7 million tonnes-189 million tonnes, Filho said.

Demand for the sweetener is tipped to stay fairly robust, with analysts in New York saying the main buyers will be Pakistan, Bangladesh, China, Russia and the Middle East.

Weather is the wild card for the season, especially in places like India and the United States. A cyclone has already struck Australia's cane farms, possibly crimping supplies in coming months.

The European Union, a major exporter of sugar, has been driven from the scene after the World Trade Organization ruled that its subsidies violate global trade rules. European sugar output is seen falling from this season.

India's weather office said Monday this year's monsoon was likely to be just below normal, with a 22 percent probability the rains may be deficient. A weak monsoon could well dent sugar and crop production.

In the Americas, there are several forecasts that the Atlantic Hurricane Season, due to begin on June 1, could see more storms pound Central America and the U.S. Gulf Coast states of Florida and Louisiana, the two leading sugar-producing regions.

Storms battered both states last year and forced Washington to increase the amount of sugar imported into the country to head off a supply squeeze.

Central America is also a major sugar exporter and a storm there could tighten supply further.

You have weather, oil, ethanol and the funds diving into commodities like sugar. It is going to be a volatile mix, a broker in New York said.

Sugar prices are relatively high and will also remain high due to a situation where there is more competition for cane now and the EU is going out of exports, ISO's Baron said.