Brazil farmers poised to push coffee price higher

A worker selects arabic coffee beans at Barreiro farm in Pocos de Caldas, July 4, 2008.

GUAXUPE, Brazil (Reuters) - The rising cost of fertilizer and farm labor is squeezing profits from coffee in leading global grower Brazil but tight supplies should strengthen growers' hands when haggling at the farm gate.

Fertilizer prices have as much as doubled in less than a year for some producers, depending on their region's soil quality, and labor costs have been climbing amid a sustained commodity-driven economic boom.

Farmers say the final blow has been the constant appreciation of the local currency, eroding income for growers as it strengthens against the U.S. dollar in which arabica is traded on the futures market.

New York arabica futures are at $1.42 a lb, up about 25 percent from July 2007.

But a dollar bought 1.9 reais this time last year, and only 1.6 now, a fall of 15 percent, wiping out most of the rise in coffee prices over the same period. When the rise in fertilizer, agrochemical, fuel, debt and labor costs in reais weigh in, farmers say they are worse off.

But their lot could take a turn for the better.

Farmer cooperatives and exporters say tight supplies on the domestic market, which a governmental agency says have fallen to a record low this year, could put the grower in a strong position when it comes to striking a sale.

"Yes, basically. In many cases," said John Wolthers, a trader at the Comexim coffee trader based in Brazil's port town Santos in Sao Paulo state when asked if market conditions could give Brazilian farmers the upper hand in physical sales.

"We have never seen such a difficult in-between period," he said, referring to the inter-harvest lull and domestic coffee stocks which are at record-low levels.

He said higher world prices in the last few weeks, which peaked at about $1.57 per lb, had spurred exporters to buy beans up until a subsequent fall to about $1.40, which had wrung profits out of the transactions.

"Now (trade) is completely paralyzed," he said.

SUBSIDY CUSHION

A government subsidy scheme known as the Pepro, which gives growers a cash supplement whenever they sell their coffee within a certain price range, but not below it, gives growers a strong incentive to hold out for the best possible price.

And annual government-subsidized loans for farmers to cover costs and tide them over until the harvest could leave some even more comfortably placed to wait for an upturn in prices before parting with their beans.

"It's certain the market will rise. I think it'll be $1.50 to $1.70 in the next two months. Farmers' costs are up and they won't sell at any price," said Lucio de Araujo Dias, a trader at the world's largest coffee cooperative, Cooxupe.

Dias, based at Cooxupe's headquarters in the town of Guaxupe at the heart of Brazil's main coffee-growing region, said a price rise was inevitable to oil the market's wheels.

"Farmers need to make money to keep making coffee," he said.

No announcement has been made yet on how much of the harvest, expected to provide between about 45 and 50 million 60-kg bags, will be covered by the Pepro scheme, but trader Wolthers expected it would make life harder for buyers.

"For us, it takes anything between 5 million and 10 million bags out of the market," he said, estimating the quantity farmers could refrain from selling as a direct result of Pepro assistance, unless they received their asking price.

Ipanema Coffees, one of the world's largest coffee plantations, is a far cry from the small-scale family-run farms where growing coffee often provides a hand-to-mouth income, but even there the cost equation has been biting.

"I can't imagine what those farmers who could not mechanize in mountainous areas did," said Ipanema manager Washington Luiz Alvez Rodrigues as workers drove $500,000 harvesters through the fields at dusk, tearing coffee cherries from the trees.

He said production costs there had risen to $1.10 per lb compared to 60 cents six years ago. Without mechanization, he said the business would be making a loss on the roughly 90,000 to 130,000 bags it turns out in a year.

(Editing by Christian Wiessner)