Millers taking part in Datagro's international sugar conference in São Paulo said that a recent price rally in New York could help forward sales of sugar, which in turn might lead mills to earmark more cane to sugar production than they did this year, and less to ethanol.

They also think that a new right-wing government in Brazil that is pledging to adopt market-friendly policies would eventually lead to higher fuel consumption, sustaining ethanol demand and forcing sugar consumers worldwide to pay more for the Brazil-made sweetener to compete.

"I think mills have to take the opportunity to hedge some sugar now and avoid betting too much on ethanol next year, which is always subject to oil prices and public policies," Gabriel Feres Junqueira, chief executive officer of Bioenergética Aroeira mill, told Reuters.

"Considering currency exchange rates and New York futures currently, they could fix a price of 1,250 reais per tonne of sugar for next season, which is a reasonable value," he said. His company decided not to produce any sugar this year, allocating 100 percent of the cane to ethanol production, Junqueira said.

Bioenergética Aroeira was one of the 17 mills in Brazil's center-south that concentrated entirely on the biofuel.

On average, the center-south region is earmarking around 67 percent of cane to ethanol production and only 33 percent to sugar in the current season.

"The worst is in the past, the outlook is constructive," said Mariangela Grola, market intelligence manager at Raízen, the world's largest sugar producer.

She expects sugar prices could go up to 16 cents per pound if global supplies shrink due to production difficulties in some producing countries and buyers turn strongly again to Brazil, where they will have to compete with ethanol.

Mario Lorencatto, CEO of Coruripe, one of the ten largest sugar and ethanol companies in Brazil, said his company already managed to secure profitable forward sales, combining New York futures with local currency non-deliverable forward (NDF) contracts. The arrangement has been profitable, he said.

"It is quite possible that more sugar (production) will be considered in Brazil next season at this level of prices," said Jeremy Austin, Brazil director for sugar trader Sucden, in a presentation during the conference.