The global sugar surplus will be 23 percent smaller than forecast as millers in leading producerBrazil direct more cane to making ethanol at the expense of the sweetener, according to Green Pool Commodity Specialists Pty.

Sugar supplies will be 2.89 million metric tons higher than consumption, the Brisbane, Australia-based researcher said in its second estimate for the 2013-14 season that starts in most countries in October. That compares with a previous forecast of 3.75 million tons and excess supplies of 8.99 million tons in 2012-13. Millers in Brazil’s center south, the main growing region, will direct 45.2 percent of the cane harvested to making sugar, down from a previous estimate of 47.6 percent and last year’s 49.4 percent.

“Ethanol obviously pays more than sugar, and it is usually paid for more promptly than is sugar,” Tom McNeill, a director at the company, said in a report e-mailed yesterday. “While there is some price pressure from stronger supply, we expect that consumption will kick in strongly for hydrous ethanol at the pump, and steady prices.”

The price of hydrous ethanol, the pure biofuel used in flex-fuel cars in Brazil, is about 16.50 cents a pound, according to Green Pool. That’s 1.3 percent more than raw sugar futures for July delivery traded on ICE Futures U.S. in New York. Sugar production in the center south will be 34.5 million tons, Green Pool estimates. That compares with a previous estimate of 35.8 million tons and last year’s 34.2 million tons.

Global sugar production will fall to 177.7 million tons in 2013-14 from 181.8 million tons a year earlier as output drops in countries including India, the world’s second biggest grower, andMexico, the company forecasts. Consumption will rise to 173.8 million tons in the 12-months started in April from 170.8 million tons a year earlier.

Indian Output

Dry weather in some of India’s main producing states will cut the nation’s sugar output by 9.6 percent in 2013-14 from a year earlier to 22.5 million tons, according to the report. Production in Mexico will probably fall to 5.8 million tons from 6.5 million tons in 2012-13, Green Pool estimates.

“Mexico had very good growing conditions for its crop in the past year, and a sharp reduction in the pest and disease issues that usually beset the crop also helped maximise output,” McNeill wrote. “Can that be repeated in 2013-14? Current returns say no, and the statistical probability of two record crops is also low in Mexico. Hence the lower forecast for 2013-14.”

In Thailand, the second-biggest exporter, production will rise to 10.5 million tons in 2013-14 from 10.1 million tons in the current season, Green Pool estimates. The cane crop there will be a record 100.1 million tons in 2012-13 even with a poor monsoon, according to the report.

Plantings Boosted

Sugar prices have fallen 55 percent since reaching a 30-year high of 36.08 cents a pound in February 2011, as farmers from Brazil to China boosted plantings. Futures, down 17 percent in 2013 to 16.29 cents, are heading for a third year of declines. That would mean the longest slump since 1992.

“The market is working at taking away the incentives it so strongly provided to producers in the past two to three years,” McNeill said. “At present, even deferred contracts are trading at or below the cost of production of the major exporters, so that the balance sheet must see serious rectification before the market will trade above those levels again.”