UPDATE 1-Brazil demand, rains counter dollar's pull on sugar exports
* Drought in northeast supporting local sugar, ethanol price
* Distressed mills jumping on strong dollar to export sugar
* Ethanol price hits key level against gasoline (Adds details from Unica's latest crushing report)
By Reese Ewing
SAO PAULO, June 26 (Reuters) - A strong dollar has prompted Brazilian mills to sell sugar for export, but rain, growing demand for ethanol and drought in the northeast have contained a surge in physical delivery of the sweetener on the international market for now.
Accounting for half the global exports of sugar, Brazil is in the peak of crushing a record 35.5 million tonnes of sugar from its main center-south cane crop, according to the cane industry association Unica.
After broadly falling since early 2011, futures prices reached a point of technical support in a Fibonacci retracement and mustered a recovery of 4.9 percent since hitting a three-year low of 16.17 cents/lb on June 13.
But traders and analysts are wary of calling this a floor. Recent support in prices has coincided with atypically wet weather drenching Brazil's main center-south cane belt.
"Some big mills in Mato Grosso do Sul and Parana have lost 10 days of crushing opportunity early in June and rains will shut down harvest for a couple more days this week at least," said meteorologist Gustavo Verardo at local forecasters Somar.
Mills' sugar production here fell to 1.78 million tonnes in the first half of June compared with 1.84 million tonnes in the second half of May, which also was beset by rains, Unica said in its bimonthly crushing report on Wednesday.
Weather is expected to turn drier over the cane belt in July and August, though, he added, allowing crushing to pick up.
President of local analysts Job Economy, Julio Borges, said the rains may only provide short-term support for physical and futures prices, adding that dry weather in September 2012 reversed the effect of wet weather in May-June last crop.
"It all depends on climate through the whole crop," he said.
Traders also said they were bearish about the effects of the Brazilian real's weakening against the dollar by 10 percent since early May, which causes local producers to sell sugar into an oversupplied international market, weakening prices.
"Mills with liquidity problems especially - we are talking about 20 percent of all mills - are jumping on this fall in the real to sell physical sugar on the FOB market," the local head of sales at a large Asian trader said.
Arnaldo Correa, director at commodities risk consultants Archer, calculated mills were getting 60 reais ($27) per tonne more for exported raw sugar than they were on June 13 when prices bottomed.
"It's yet to be seen if this is a floor. It looks a lot like the Russian billy goat," Correa said, recounting a parable of a family that complained to their local Communist party leader about the abysmal condition of their apartment.
The local magistrate resolved to solve their problem by ordering a goat to be sent to live with them. After the animal destroyed the furniture and soiled the apartment, the family begged the magistrate to remove it, which he did.
When the official returned to check up on the family, they said 'now that goat has been removed, conditions are much better', Correa said. "The sugar market is so depressed, any uptick in price makes it feel like the goat has been removed."
Sugar exports have picked up with 1.44 million tonnes flowing out in the first three weeks of June, almost the same amount as exported in all of May and above the 1.29 million tonnes recorded in June 2012. But rains remain a risk to smooth loading at the ports, where terminals are uncovered, Somar said.
The Trade Ministry will release total June export figures on Monday afternoon.
Brazil's northeast cane crop, which accounts for 10 percent of national sugar and ethanol output, suffered a severe drought that reduced output by 15 percent this season.
"Big groups like Cosan and Copersucar are buying up ethanol and even sugar in the center-south when prices dip and shipping it to the northeast," said an executive at a large European-controlled milling group. "This will go on through October."
Hydrous ethanol prices in the center-south have hit key price levels that makes the biofuel a better buy for drivers of flex-fuel cars than filling up with gasoline.
Borges estimates that anhydrous ethanol, which was the most profitable business for mills until late May, is now priced on par with selling sugar to the local market. Anhydrous is blended into gasoline at a 25 percent blend nationally.
At the same time, hydrous ethanol sales are about as profitable for mills as selling sugar to the export market.
The president of local analyst firm Datagro, Plinio Nastari, estimates that if hydrous ethanol consumption increases by 300 million liters a month in Brazil, it would remove 5.75 million tonnes of sugar from the market and zero out the global sugar surplus by the next October-September season. (Additional reporting by Chris Prentice in New York and David Brough in London; Editing by Kenneth Barry)
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