The crude oil and sugar markets will become increasingly correlated as demand for sugar-based ethanol rises, sugar analyst Czarnikow said Wednesday.
"Demand for ethanol is growing rapidly in response to new technology, a desire to reduce carbon emissions and high energy prices," said the report.
If the U.S., the world's largest ethanol consumer, decide to remove their current import duty on the biofuel, 2008-09 could see significant growth of ethanol exports from Brazil. In conjunction with this, high oil prices are also driving up demand for alternative fuels such as ethanol.
As the world's leading sugar grower and producer of ethanol, Brazil currently uses around 54% of its sugar crop to make the biofuel. The country can change its ethanol and sugar production mix easily, enabling it to react quickly to supply and demand trends and prices.
"Sugar prices are likely to be guided by trends in the energy markets, though the ability to arbitrage physical values is constrained by rigidities such as the U.S. import tariff of 54 cents a gallon," of Brazilian ethanol, the report said.