SAO PAULO (Reuters) -Growth of Brazil's corn ethanol sector has become key to meeting the country's growing demand for the renewable fuel under a new government mandate to use more ethanol in gasoline, even as sugarcane-based ethanol output has stagnated.

Brazil is the world's largest producer of ethanol from sugarcane, but output has flattened since the turn of the decade, while corn ethanol production has more than tripled, according to data from sugar and ethanol industry group UNICA.

In the 2024/25 cycle, corn ethanol output in Brazil's center-south region rose nearly 31% from the year before to 8.19 billion liters, according to an UNICA report.

On Wednesday, Brazil's government approved a measure hiking the mandatory blend of ethanol in gasoline to 30%, from 27% previously, which will require well over 1 billion more liters of ethanol per year.

"Thanks to corn ethanol, we are increasing the blend to 30%, right? If it weren't for this increase in production, we wouldn't be able to implement this policy," said Guilherme Nolasco, president of the corn ethanol industry group UNEM.

Brazil's government initially put off raising the ethanol blend in gasoline this year, which some attributed to concerns it could push up prices. By the time officials confirmed the move this week, they were touting it as a way to bring down prices at the pump.

Amance Boutin, business development manager at consultancy Argus, said the decision to implement the new biofuel mandate from August is a vote of confidence in the capacity of the corn ethanol sector to keep ramping up production.

At the same time, cane growers in Brazil, which is also the world's top exporter for sugar, are expected to maintain their preference for producing the foodstuff over fuel, said Gabriel Barra, director and head of Latin American equity research for oil and gas, petrochemicals and agribusiness at Citibank.

"Sugar will continue to take a large part of this mix from sugarcane processing," Barra said. "Ethanol will most likely continue to lose this competition."

In March, Citi forecast corn ethanol production in Brazil would hit 16 billion liters by 2032, a sentiment echoed by UNEM's Nolasco.

"We have the capacity to double current production by 2032," Nolasco said.

According to UNEM, corn ethanol represents 23% of current ethanol production in Brazil and it expects it to grow to account for 40% of the fuel's output over the next decade.

At an industry event in Sao Paulo this month, UNICA Chief Executive Evandro Gussi said Brazil is not concerned about whether ethanol comes from sugar, corn or another source, as long as it has low carbon emissions and does not deprive the country of needed food.

"In terms of biofuel and ethanol. Brazil ... is not the land of 'either' - either this or that," said Gussi, adding he expected both corn- and cane-based ethanol production to grow.

Some in Brazil's corn sector are already pushing to expand other crops for use in ethanol production, with sorghum a viable option for farmers who miss the planting window for the country's second corn crop.

Increasing the output from sugarcane crops will be crucial to luring fresh investments and boosting the sugar-energy sector, said Cesar Barros, CEO of sugarcane research company CTC, blaming the recent doldrums on a lack of innovation.

By contrast, corn has benefited from years of research and development by major multinationals, Barros said. Corn is the crop of choice for the world's biggest ethanol producer, the U.S.

"In the same 20-year horizon in which corn doubled its productivity in Brazil, sugar cane practically stagnated, with average productivity increasing very little," Barros said.

In April, following years of research, CTC announced the launch of a number of new products that it said will help double the output of sugarcane on Brazilian fields by 2040.

"Doubling sugarcane productivity in the next 20 years will ... enable new investments, whether in new plants or in increasing capacity," Barros said.