Cash-strapped Brazilian mills, which struggled for years with weak sugar prices due to a global glut, say they are now locking into a surge in domestic prices to cut debt.

The domestic sugar market is tightening in Brazil after heavy rains cut sugar content in cane, while the global market is shifting into deficit after years of surpluses, driving up world raw sugar futures prices to near 10-month highs.

Many mills in Brazil, the world's top sugar producer and exporter, have closed after years of low sugar prices as a result of over-supply of the sweetener.

Last week, Brazilian sugar and ethanol producer Tonon Bioenergia SA, which operates three mills, sought court protection against creditors. [ID:nL8N13Z37N]

Low-quality white, so-called crystal sugar traded in Brazil’s domestic market at 80.19 reais per bag (50 kg) on Friday, the highest price since January 2012, according to a market report released by think-tank Cepea/Esalq on Monday.

“We have no investments in expansion. All the available resources are being earmarked for crop care and maintenance,” said Paulo Prignolato, chief financial officer of Biosev SA, the world’s second largest cane processor.

“We are focusing on debt management.”

Referring to the recovery in the domestic market, Marcos Lutz, CEO of sugar producer Cosan Ltd, said, “We do not foresee a reaction in the Brazilian sugar and ethanol sector in terms of increasing capacity, due to the general situation regarding debt.”

Rubens Ometto, chairman of Cosan, said, “Resumption of investments will depend on each company, but I believe the majority will work to pay bills they’ve been carrying for some time now.”

Mills are stepping up manufacture of more remunerative ethanol biofuel from cane, rather than sugar, setting the scene for tight supplies of both ethanol and sugar in the inter-crop period running from December/January until April.

Taking the rainfall of recent weeks into consideration, Rabobank has cut its forecast for sugar output and sugar content in center-south Brazil in 2015/16 to 30.7 million tonnes and 131.8 kg/tonne, from previous forecasts made in September of 31.5 million tonnes and 134 kg/tonne.

Green Pool also cut its sugar content forecast for center-south Brazil.

"We now think it cannot make 132 kg/tonne, and marked it down to 131.7 kg/tonne," the Australia-based analyst said in its latest weekly report.

“High U.S. dollar debt levels are crippling many (Brazilian) milling companies, despite unbelievably strong real/tonne returns for sugar, and very strong returns for ethanol.”

(Editing by William Hardy)