By David Brough
LONDON (Reuters) - Risks of further falls in Brazil's currency to near 12-year lows and the possibility of a huge influx of Indian sugar to the world market are driving demand for raw sugar put options, trade sources said on Monday.
Strong buying of put options by investment funds, trade houses and producers is insurance against risks of a selloff in benchmark ICE raw sugar futures from near eight-month highs.
ICE March raw sugar futures hit a peak of 14.43 cents a lb on Oct. 9, fuelled by expectations of a tighter global market.
March futures eased 0.06 cent or 0.4 percent to 14.21 cents a lb at 1447 GMT on Monday, after touching a session high of 14.40 cents, very close to the Oct. 9 high.
Bullish sentiment has emerged in the sugar market due to wet weather hampering the cane harvest in top grower Brazil, combined with a recent gasoline price rise there that is expected to boost demand for cane-based ethanol biofuel.
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Views held by many sugar traders that the real could fall further due to uncertainties over Brazil's struggling economy, after a downgrade by ratings agency Fitch on Thursday, have encouraged further buying of put options to reduce risks of losing money in a selloff.
A weaker real encourages Brazilian producers to increase sales of dollar-based sugar to lock in local currency returns, weighing on futures prices.
Dealers also referred to put options buying due to fears of vast Indian stockpiles of sugar overhanging the global market.
"A lot of Indian producers have been talking about buying put options because, by the time an Indian raw sugar export subsidy is implemented, the sugar market might suddenly fall, before they have time to price their crop," one London-based broker said.
India, the world's No. 2 producer, has been pushing mills to sell sugar on the international market and use the proceeds to clear huge debts they owe farmers for sugarcane. Traders are waiting for possible implementation of a raw sugar export subsidy.
Buying a put option gives producers the opportunity to sell raw sugar futures at a given strike price. If the market rises further, however, they do not need to exercise the option and can benefit from any further upside in the market.
"They tend to do it (buy put options) into rallies when premiums are cheaper," one broker said.
Traders spoke of brisk demand for put options at 11.50, 12 and 13 cents.
(Reporting by David Brough; Editing by Mark Heinrich)