The switch by Brazilian mill from turning cane into ethanol rather than sugar identified earlier this week may set a trend, Macquarie said, forecasting a recovery in prices of the sweetener to levels not seen for six months.

Macquarie acknowledged the pressure on sugar prices from weak import demand as strong crops in China and Russia curb their need for foreign supplies.

And it raised again its forecast for Brazilian Centre South cane production, to 515m tonnes, in 2102-13, flagging the extent to which mills had recovered their pace of crushing – which hit a record in August – after a rain-delayed start to the season.

The cane harvest to could rise to 550m tonnes in 2013-14, thanks to the long-term boost to cane yields from the rains, besides the impact of replanting ageing, low-yielding crops, the bank said.

'More diversion towards ethanol'

However, even while trimming its forecast for New York sugar prices in early 2013, its forecasts factored in a return to 24.5 cents a pound by late next year as ethanol makes a bigger call on Brazil Centre South cane.

The region, responsible for nearly 90% of Brazil's cane harvest, "will manage to eke out a decent recovery next season in cane production," Macquarie analyst Kona Haque said.

"But we believe that there will be more diversion towards ethanol, which will limit the growth in sugar production."

'Ethanol is a lot more lucrative'

The forecast reflects a recovery in Brazilian ethanol exports, given the hit to US competitiveness in the biofuel from high prices of corn, the main feedstock in America.

"The export market for ethanol is a lot more lucrative right now for Brazil than before, and exports are running over 40% above last season's level."

Furthermore, the bank flagged talk that the government may in May restore to 25%, from 20%, the level of ethanol mixes with gasoline, swalloing up some 20m tonnes of cane, equivalent to 2.6m tonnes of sugar.

Rising gasoline prices too "could easily alter the Brazilian cane production mix back in favour of ethanol, which in turn would limit the amount of sugar Brazil exports".

Mill results

The comments come two days after data from industry group Unica showed Centre South mills in the last half of September using only 48.6% of cane for making sugar, with 51.4% for ethanol, below rates so far in 2012-13.

In the last half of September 2011, the proportions were 51.8% of cane for sugar and 48.2% for making ethanol.

The recent dynamic reflected indeed strong export hopes, with mills producing 428.7m litres of ethanol for export during the period, more than twice that a year before.

However, the large number of mills offline during the fortnight for maintenance has raised some questions over whether the degree of ethanol will prove anomalous.

Indian setback

Macquarie also cited lower hopes for Indian sugar production in 2012-13 in its forecasts, cutting its output estimate by 600,000 tonnes to 23.8m tonnes "on account of the poor [cane] yields in south western states" following disappointing monsoon rains.

"A loss of 2m tonnes-plus of sugar in India will make it very difficult the country to maintain the 2m-3m tonnes of exports it achieved this season," Ms Haque said.

Furthermore, strong demand means "India's stock situation may not be as comfortable as the market is thinking".

New York sugar for March stood 1.9% lower at 20.86 cents a pound at 07:15 local time (12:15 UK time).