Brazil sugar cane condition varied

Datagro's team of agronomists are currently assessing cane in Brazil, having recently revised down their 2011-12 centre-south cane output projection to 536 million tonnes due to disappointing yields.

Other analysts also revised down projections, fuelling a recent rally in sugar futures to trade at near four-month highs. ICE October raw sugar futures rallied over 4 percent to hit a contract high of 30.31 cents a lb on Tuesday.

Now the international sugar market is on tenterhooks for a forecast on centre-south output from Brazilian cane industry group Unica, which is due to be released on Wednesday and looks certain to be cut from the previous estimate in March.

Plinio Nastari, the closely followed head of sugar and ethanol analyst Datagro, said some parts of Parana and Sao Paulo states had been affected by frost.

"Some regions have been affected by frost, and some regions are in recovery," he said.

"The situation is very heterogeneous. That is why we (agronomists) are travelling so much."

Nastari said that while frost can damage cane, the cold weather can benefit sugar concentration inside the stalks.

Downwardly revised cane output forecasts augured for a continuing tight market in cane-derived ethanol, as sugar production was more profitable than ethanol, Nastari said.

"Ethanol prices should stay high and could even continue to go up," he said.

"The impact is going to be that any reduction in total sugar supply should have a greater impact on ethanol than sugar, because sugar provides better returns in terms of price."

Nastari said he believed that Brazilian authorities should avoid any reduction in the ethanol blend ratio in gasoline, because the market is capable of responding to consumer requirements without intervention.

"Any ethanol blend ratio reduction would imply greater gasoline imports," he said.

"Is this (imports) necessary? I don't think so because industry is capable of making ethanol to meet demand."

Nastari added, "Any reduction in the blend ratio would give the message that the government is interfering in demand."

The analyst said he saw a market opportunity for imports of US anhydrous ethanol to north-northeast Brazil, as US origin bio-fuel would have a competitive advantage over supplies from the distant centre-south of Brazil.

"This window will probably remain open for some time," he said.

Nastari said he believed that the latest aggravation in the European debt crisis, which had weighed on soft commodity futures this week, would ultimately turn out to stimulate upside in futures prices across the commodities board.

"I would see commodities across the board eventually being a secure home for investors in these conditions," he said.

"Commodities are physical things, they're not paper. They're something that people use, and consume, for which demand can be inelastic."

COPYRIGHT REUTERS, 2011