Aug. 30 (Bloomberg) -- Sugar output in Brazil, the world's biggest producer and exporter of the sweetener, will fall this year as mills divert more sugar cane to make fuel.

Brazilian mills will produce 30 million metric tons of sugar from the May-to-November crop, down from 30.2 million tons last year, the Agriculture Ministry said today. The agency previously forecast output to rise to 31.3 million tons.

Brazil, the world's biggest maker of ethanol from sugar cane, is stepping up output of the fuel as more drivers buy so- called flex-fuel cars, which can run on ethanol, gasoline or any blend of the two. Falling sugar prices also discouraged the production of the sweetener, the ministry said in its report.

The drop in sugar output ``results from the poorly remunerated price of the product in the market,'' the ministry said. Production of ethanol increased, ``motivated mainly by demand in domestic and foreign markets.''

Ethanol production will rise to a record 21.3 billion liters (5.6 billion gallons) from this harvest, up from a May estimate of 20 billion liters, the ministry said. Output will rise from 17.5 billion liters from the previous crop.

Sugar futures on the New York Board of Trade have dropped 19 percent this year on expectations that Brazil and India, the largest growers of sugar cane, will harvest bigger crops. The contract for October delivery rose 0.09 cent, or 1 percent, to 9.51 cents a pound at 10:55 a.m. New York time.

Brazil's sugar-cane harvest will rise to a record 547.2 million tons, compared with a previous estimate of 528 million tons, the ministry said. Output will rise from 474.8 million tons last season, the ministry said in its second estimate for this year's crop.

To contact the reporter on this story: Carlos Caminada in Sao Paulo at at ccaminada1@bloomberg.net; Katia Cortes in Brasilia at at kcortes@bloomberg.net

Last Updated: August 30, 2007 11:19 EDT