April 17 (Bloomberg) -- Sugar mills in Brazil's major producing region will turn a record 58 percent of this year's cane crop into ethanol as surging oil prices boost demand for alternative fuels.

Ethanol production in Brazil's Center-South, which accounts for more than 80 percent of the nation's output, will rise to 24.3 billion liters (6.4 billion gallons) this year from 20.3 billion liters last year, the Sugar and Ethanol Industry Association said today. Last year, 56 percent of the crop was processed into fuel, up from 51 percent in 2006.

Sugar rose as much as 1.4 percent in New York earlier today on expectation record oil prices will prompt Brazil, the biggest maker of the sweetener, to turn more cane into ethanol as global demand for alternative fuels grows. Brazil's increasing number of so-called flex-fuel cars, which can run on just ethanol, gasoline or any blend of the two, is also stoking sales of the fuel.

``Most new projects are focusing on ethanol,'' said Antonio Padua, technical director at Unica, as the association is known. ``The best product for the industry has been ethanol sold on the domestic market.''

Rising ethanol prices in the U.S., the world's biggest consumer of the fuel, will encourage Brazilian mills to export more this year, Padua said. The current price of about $2.70 per gallon is above the $2.50 that makes exports to the U.S. profitable for Brazilian mills, he said.

Caribbean Plants

Ethanol exports from the Center-South in the crop year that started this month will rise to 3.9 billion liters, up from 3.1 billion liters, Unica said.

Brazil's direct exports of ethanol to the U.S. in this crop year will likely grow by about 300 million liters, Padua said. Shipments were 766 million last year.

Total Brazilian exports to the U.S., including from plants that process dehydrated ethanol in the Caribbean to avoid a tariff of 54 cents per gallon, will rise by about 800 million liters to about 2.59 billion liters, Padua said.

A record sugar-cane crop will allow mills to also boost sweetener production and exports, adding to a global surplus.

Sugar output in the Center-South will climb 9.2 percent this year to 28.6 million tons from 26.2 million tons in 2007, Unica said.

The region's sugar exports from the current crop will rise to 18.9 million tons from 16.4 million tons, Unica said.

Center-South sugar-cane growers will reap a record 498.1 million tons of the tropical plant this year, up from a revised record of 431.2 million tons, Unica said.

The outlook for rising sugar output in Brazil, even as mills turn more cane into fuel, led futures to close lower today after gaining for most of the day. Sugar for July delivery fell 0.04 cent, or 0.3 percent, to 13.3 cents a pound on ICE Futures U.S., formerly the New York Board of Trade.

To contact the reporter on this story: Carlos Caminada in Sao Paulo at at ccaminada1@bloomberg.net

Last Updated: April 17, 2008 16:52 EDT