BRASILIA (Commodity Online) : World’s largest sugar producer Brazil’s sugar output is likely to fall by 1.5 million tons due to drought in its major growing region.

According to Datagro analysts said the likely fall might lift prices and cut their forecast to 33.7 million tons for the worst hit Center South region, which accounts for about 90% of production in Brazil.

The downgrade reflected a drought which had cut expectations for the Center South cane crush to 536m tonnes, down from an April estimate of 561m tonnes – and implying a decline from last season's level.

Datagro also cut, by 1m tonnes to 24.2m tonnes, its forecast for exports from the region, a factor which should support international prices.

The downgrade comes as Unica, the Brazilian cane industry association, is revising its forecast for Centre South production, having initially estimated the cane crush at 568.5m tonnes, up from 556.7m tonnes in 2010-11, and pegged sugar output at 34.5m tonnes.

The association has also warned of the impact on future yields of dry weather, although this had at least enabled the pace of harvest to pick up after a slow start.

Rabobank analysts said in a report on Thursday that the disappointing harvest so far had "reaffirmed market concerns that adverse weather conditions will likely keep sugar content [in cane] depressed during the season, and that sugar output will be lower than initial expectations".

However, the bank said that the market was already factoring in a crush of 33.0m tones, below the figure Datagro has guided to.

And, with the prospect of a pick-up in exports from India, the second-ranked producer, and recent rains lifting prospects for the European beet harvest, the bank kept a forecast of sugar prices weakening in the July-to-September quarter.

"We expect downside potential to be limited by strong demand, the need to encourage growers and continued thin global stocks," the report added.