A review of the history and evolution of the sugar cane culture in Brazil is presented. An econometric model is constructed to explain the economic relationships of supply and demand of sugar, hydrous ethanol (ethyl alcohol), and anhydrous ethanol in Brazil overtime. Estimates of the parameters in the model are obtained using the methods of ordinary least squares and three stages least squares. Because the number of exogenous variables is larger than the number of observations, principal components of the exogenous variables is used. The model estimated using three stages least squares with seven principal components has the best performance among the alternatives considered;Using the estimated model, the level of a number of policy variables is determined in consistency with the objectives of ethanol production established by the Brazilian government for 1985. It is estimated that in 1985 the proportion of anhydrous ethanol added to gasoline must be 16.5 percent. It is also estimated that the price paid to producers of sugar cane must be significantly larger during the period between 1981 and 1984, than it was in previous years, for the target production of sugar cane to be reached in 1985;Analysis of the net income accrued by producers and the government since the creation of the National Alcohol Program (Proalcool) in 1975 reveals that producers of sugar have been able to triple their net annual income. Independent producers of ethanol have also been able to accrue positive net results during this period;It is concluded that the Proalcool has been beneficial to the Brazilian economy, largely because of the savings in oil imports and the internal creation of jobs, while at the same time it has contributed to a superavit in the government's budget.