FILE PHOTO: A view shows the logo of Brazilian state-run oil firm Petrobras in Rio de Janeiro, Brazil June 5, 2025. REUTERS/Ricardo Moraes/File Photo

RIO DE JANEIRO (Reuters) -Brazil's Petrobras is leaning toward corn as the raw material for a renewed foray into ethanol, potentially sidelining sugarcane and beleaguered sugar producer Raizen, three Petrobras sources familiar with the matter said, citing preliminary evaluations.

Energy company Petrobras, majority-owned by Brazil's government, has previously said its potential return to ethanol would involve buying minority stakes in other companies, similar to past investments.

While sugarcane ethanol has not been definitively ruled out, corn ethanol is gaining favor in Petrobras, the sources told Reuters over the weekend, citing falling production costs driven by corn crop growth and rapid expansion in the industry. Sugarcane ethanol output, however, has stagnated amid competition for the raw material from the sugar industry.

Petrobras is also eyeing increased corn output in Brazil's northern regions, where ethanol supplies are low but corn production is rising, the sources said.

"We're closer to corn than cane. The outlook is better. We're talking to several corn producers," one of the sources said, without naming any companies that Petrobras was talking to.

Petrobras said in a statement that it has no planned investments in ethanol or distribution of the fuel with Raizen.

Two other Petrobras sources said discussions about re-entering the ethanol sector remain in early stages.

"The return to ethanol is certain, but there's nothing concrete with anyone," one of those sources said, warning to expect delays to any eventual deal.

The company sources spoke on condition of anonymity because they were not authorized to speak to the media.

Raizen, a joint venture between Cosan and Shell that produces sugar and sugarcane ethanol, was hit by bad news last week when it reported a swing to a first-quarter loss and mounting net debt.

On Monday, Raizen shares rebounded from a 16% drop last week, fueled by reports over the weekend suggesting that Petrobras may be considering a stake in the company.

Raizen said it would not comment on the matter when asked about those reports.

"They want to sell to us, but talks haven't even started here," one of the Petrobras sources said, referring to Raizen.

(Reporting by Rodrigo Viga Gaier; Additional reporting by Gabriel Araujo; Writing by Roberto Samora and Oliver Griffin; Editing by Edmund Klamann and Marguerita Choy)