UPDATE 3-Brazil gov't gives coffee producers 3-mln-bag lifeline

Wed Aug 7, 2013 5:46pm EDT

(Adds market and producer reactions, context, bylines)

* Brazil to offer put options for 3 mln bags coffee

* Gov't plans to buy coffee at 343 reais ($149)/bag

* Measures announced after gov't angered growers with delays

By Gustavo Bonato and Pedro Fonseca

SAO PAULO, Aug 7 (Reuters) - World-leading coffee exporter Brazil will help its struggling producers by offering to buy up to 3 million bags at 343 reais ($149) a bag for federal stocks, President Dilma Rousseff said on Wednesday, news that pushed coffee futures up nearly 3 percent during the day.

Rousseff, on a tour of the premier coffee producing town of Varginha in Minas Gerais - the state that accounts for half of Brazil's harvest - said the put options, to be auctioned to producers and cooperatives, would mature in March 2014.

In a local radio interview broadcast on Wednesday morning, Rousseff had said incorrectly the strike price for the options would be 346 reais/bag, but the Agriculture Ministry told Reuters the correct price was in fact 343 reais.

"I was here in the region when I was a candidate for president in 2010 and I know how important the coffee producers are for the economy," Rousseff, who is expected to run for re-election in 2014, said in a speech broadcast Wednesday afternoon by the government's NBR TV channel.

If producers buy all the options on offer and coffee prices are below 343 reais/bag in March, the government will buy 3 million bags of arabica coffee, roughly half of the coffee stocks currently held in government warehouses. This would bring government coffee stocks to their highest levels in more than a decade.

Rousseff also said the government would help finance the storage costs of the coffee crop which is now in the peak of a 49-million to 53-million-bag coffee harvest.

Minutes after Reuters published the first official news of the price support program at 11:27 a.m. Brasilia time (14:27 GMT), coffee futures in New York reversed a downward trend and rose. The front month contract, at 121 cents/lb, is now up 3 cents from Tuesday's close.

Details of the support program for the coffee sector, which is struggling with rising production costs and weak prices, came after the government angered producers on Monday by delaying the widely anticipated plan.

Sources told Reuters on Friday that the government planned to buy as many as 3 million bags from producers under a put options program much like those employed four years ago when prices for the commodity fell sharply.

"The timing could be better but better late than never," said Francisco Ourique, the superintendent of Cooparaíso, one of Brazil's biggest coffee cooperatives in Minas. "The option serves as a reference price for the producer and market."

At 434 reais ($149.13)/60-kg bag, options would guarantee producers a per pound price of 112.98 cents at today's exchange rate ($1=2.30 reais). The real weakened 11 percent since May.

Brazil has a long and checkered history of trying to support global coffee prices, although its most recent attempts have not been a total failure. In the 1930s, the government burned surplus coffee or dumped it into the sea as a solution for oversupplies.

As recently as the early 2000s, Brazil had tried to stockpile millions of bags of coffee in federal warehouses in a vain attempt to raise prices by curbing supply. But the massive stockpile weighed on traders' fundamental analysis of the market and helped keep prices of the commodity low for years.

The current options program is similar to the one the government used in 2009, which had some success in providing temporary relief to growers and a floor under coffee prices.

Rainy weather during this season's harvest will reduce the amount of quality coffees. Moisture during the natural curing process that Brazil uses makes coffee bitter.

Eduardo Carvalhaes of the traditional brokerage house Carvalhaes in Santos said the government has signaled to the market that if benchmark arabicas stay between 320-330 reais, 3 million bags of quality coffee will flow to federal warehouses.

"It's going to be the very coffees that are most scarce that the government will buy," he told Reuters. (Additional reporting and writing by Reese Ewing; Editing by Gerald E. McCormick, Jim Marshall, Peter Galloway and Bob Burgdorfer)

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