SAO PAULO, Brazil - Brazil's government will likely reduce the blend of anhydrous ethanol in commercial gasoline from the current upward limit of 25 percent, Agriculture Minister Reinhold Stephanes said Thursday.

Local ethanol prices have risen sharply since August due to the high price of sugar and rains that have slowed harvesting of the center-south cane crop. The cane industry is entering its inter-harvest period when crushing stops until March.

The minister said that representatives from several ministries will meet on Monday to decide officially on whether to cut the mandatory blend.

It is not entirely clear why the government is considering lowering the blend, which can fluctuate between 20 and 25 percent by law. Cutting the limit will reduce demand for anhydrous ethanol.

Brazil will produce 7.7 billion liters of anhydrous ethanol from the current crop compared with 18.2 billion liters of hydrate ethanol, which is used to fuel the country's flex-fuel car fleet that can run on any blend of gasoline or ethanol.

The reduction in the blend of anhydrous now that the harvest of the cane crop is essentially over will do little to free up cane for production of hydrate, which has risen to nearly 70 percent the cost of gasoline at the pump in Sao Paulo state, according to the National Petroleum Agency (ANP).

When hydrate prices surpass 70 percent the cost of gasoline, motorists are better off filling up with the latter due to its superior mileage potential.

Analysts say that the government's manipulation of the ethanol blend in gasoline is a way to pressure mills to start harvesting earlier to bring ethanol supply back online and to pressure them to commit more cane to fuel production in stead of sugar.

It is unclear how effective this will be given the firm rise in sugar prices over the past year. Futures prices for the sweetener are currently near 29-year highs. The government controls the cost of gasoline and diesel for consumers but not ethanol. Gasoline prices have not risen for consumers since 2005.

(Reporting by Reese Ewing; Editing by John Picinich)

Energy