The huge debt has driven production in recent years, forcing mills to crush to get cash to pay banks. But there is no incentive for production expansion at still-depressed prices of less than 10 US cents a pound, industry executives and analysts told Reuters in a series of interviews in Bangkok.Thailand's ambitious, debt-laden sugar production is, therefore, likely to remain at present levels of slightly above five million tonnes of raw sugar from around 50 million tonnes of cane a year - about equal with rival Australia, they said.

But Thailand's ambitious pre-crash sugar expansion has created a sleeping monster, as unprofitable mills eye cost reductions which would be produced by a bigger crush.

This was creating pressure from the mills for Thailand to produce more cane so the crush could reach peak capacity of 70 million tonnes as soon as possible, despite the world over-supply, industry executives said.

"Thailand will not reduce production because the mills would like to expand capacity. But the farmers do not have money enough to increase production," said Sukhum Vicheanratanapong, deputy general manager of the Thai Cane and Sugar Corp.

Ideal size up to 100 million tonnes of cane Sukhum puts the ideal size of Thailand's sugar industry at 100 million tonnes of cane a year, double last season's 53.1 million tonnes of cane and 5.5 million tonnes of sugar.But Thailand's mills, now designed to crush for up to six months, have only enough cane for three to 3.5 months.

A world sugar price of 15C-20C a pound, against eight cents for New York July futures on Monday, could double the industry, Sukhum says. But sugar has not seen such prices for around 20 years.

"I don't think it (a doubling of production) will happen."

But a gradual increase in the world sugar price could encourage a gradual increase in Thai production, he said.

Thai sugar presently seems headed down, despite good growing weather, in direct response to low prices.

Early estimates for the present season are for a cane crop of 51.9 million tonnes, with expected sugar production around 5.1 million tonnes, millers said.

But like others, Sukhum does not see farmers reducing production greatly, if only because of poor prices of other cash crops, including cassava and maize.Mitr Phol Sugar Corp Ltd, Thailand's second biggest milling group after the debt-laden Thai Identity Group, sees no prospect of Thailand expanding to become the Brazil of Asia - yet.

Expansion just beyond production treadmill
"I don't think it's possible," said Isara Vongkusolkit, Mitr Phol president. "It will be difficult in the short-term, one or two years."

A small domestic price rise announced by the Thai government last Thursday after the imposition of a seven per cent value added tax on domestic retail sugar sales was not enough to restore industry profitability, which hinged on export prices, he said.

Present prices made it "not easy" for Thailand to produce enough cane to fill crushing capacity of around 70 million tonnes a year, he said.And limitations on land assigned to cane growing by the Thai Cane and Sugar Corp Ltd indicated a "very slow" production increase. But production would increase at nine to 10 cents a lb, he said. The Thai Sugar Manufacturing Association agrees.

"It's just enough to keep them standing still," assistant general secretary Piromsak Sasunee said of the balance between world market prices and the debt-driven need to produce.

This leaves productivity, rather than dreams about establishing an ethanol industry, as a key to whether Thailand's borrowed sugar billions might translate into domination of regional sugar markets such as Malaysia, Indonesia, China, Korea and Japan.

Thailand yields five tonnes of sugar per hectare, againstAustralia's nine to 10 tonnes, achieved with 100,000 contract growers against Australia's 6,500 farmers.

Meanwhile, with all of Thailand's mills in debt, one majorgroup remains in a protracted struggle to recapitalise a huge 14 billion baht ($360 million) bank debt.

Isara said banks would recapitalise selected loans toimprove efficiency. But full government support with loans, increased domestic prices and "understanding" was the real need.This was the main barrier to Thailand becoming the sugarBrazil of Asia, he said.