June 5 (Bloomberg) -- Ethanol production in Brazil will exceed demand unless the U.S. and Europe reduce import barriers on the fuel, billionaire investor George Soros said.

Brazil, the world's largest producer of ethanol made from sugarcane, needs a bigger export market to justify investments in building new distilleries, said Soros, who owns a stake in a Brazilian ethanol maker.

``Unless the markets in the rest of the world are opened up, you probably have overproduction coming online,'' Soros told reporters today in Sao Paulo, where he was attending an ethanol seminar. ``You've got prohibitive tariffs both in the U.S. and Europe.''

Ethanol investment in Brazil has soared in recent years as gasoline prices rose to records and demand increased for alternative fuels in the U.S., Europe and Asia. The U.S., which makes ethanol from corn, imposes an import tariff of 54 cents a gallon on Brazilian supplies. The European Union has a 19-cent levy.

The tariffs discourage Brazilian mills from exporting the record ethanol output this year, Soros said.

Distillers will process this season's sugarcane crop into 20 billion liters of ethanol, the Agriculture Ministry said last week. Growers will cut a record 528 million metric tons of sugarcane in the May-November harvest, 11 percent more than the previous record of 474.8 million tons last year, it said.

Regulatory Hurdles

Brazil's ethanol industry also faces regulatory hurdles to lure more investments, Soros said.

Environmental rules will prevent Brazil from reaching a potential 10-fold increase in output, said Soros, who became the main shareholder last year in Adeco Agropecuaria Brasil Ltda., a Brazilian sugar and ethanol producer.

Brazil's currency also is overvalued and interest rates are too high, discouraging investments, he said.

``I am a speculator in ethanol,'' Soros told the seminar's audience earlier. ``There are a lot of problems that we need to solve to make investment in ethanol really viable.''

The Brazilian real has jumped 65 percent in the past three years, the best performance against the dollar among the most- traded currencies. The country's 12.5 percent benchmark interest rate is the highest among major economies in Latin America and compares with 7.25 percent in Mexico and 5 percent in Chile.

In addition to a currency rally that reduces the local- currency value of export revenue, the declining prices of sugar and ethanol have also reduced the profitability of mills.

Declining Price

Sugar futures on the New York Board of Trade have plunged 44 percent over the past 12 months for the most-active contract. The price fell 0.36 cent, or 4 percent, to 8.56 cents per pound today in New York.

The average wholesale price of ethanol in Sao Paulo, Brazil's biggest-producing state, has fallen 37 percent in the past six weeks to 60 centavos per liter ($1.2 per gallon) on June 1, according to the University of Sao Paulo's agriculture commodities research unit.

Soros, 76, also said Venezuelan President Hugo Chavez's opposition to the use of ethanol as a vehicle fuel stems from his dependence on oil revenue to maintain himself in power.

``Chavez is a Bolivarian revolutionary based on very high revenues from oil,'' Soros said at a news conference after his speech at the seminar. ``Obviously he doesn't want any competition from ethanol.

Soros's Adeco Agropecuaria Brasil plans to invest $900 million to build three new ethanol distilleries in Brazil's Mato Grosso state.

To contact the reporters on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net; Carlos Caminada in Sao Paulo at ccaminada1@bloomberg.net.

Last Updated: June 5, 2007 14:27 EDT