ICO says Brazil's decision to increase coffee stocks correct

BELO HORIZONTE, Brazil, Sept 12 Thu Sep 12, 2013 6:41pm EDT

BELO HORIZONTE, Brazil, Sept 12 (Reuters) - Brazil's decision to increase government-held coffee stocks in response to plunging world prices for the commodity is correct, the International Coffee Organization Executive Director Robério Oliveira Silva said on Thursday.

Notwithstanding, Silva warned in a letter published at the close of this year's week-long ICO conference against repeating policy errors of the past that had lead to oversupply and market distortions in response to abrupt drops in coffee prices.

Benchmark arabica prices plunged 30 percent in the past year and are half what they were in 2011 when they pierced $3/lb. In August the Brazilian government unveiled a new coffee stock building program to help support prices for producers, similar to a program implemented in 2009 when prices fell sharply.

The government has offered to buy 3 million 60-kilogram bags of coffee by selling options contracts in three different auctions, the first of which will be held on Friday. Brazil currently has about 1.6 million bags of coffee in its public stocks, according to crop supply agency Conab.

"I think the Brazilian government is doing the right thing in building stocks to regulate the flow of harvest," said Silva, a Brazilian.

Some analysts and officials in the coffee sector question the effectiveness of such measures, which the government has tried in the past with mixed results. By shielding producers in the world's largest producer of coffee from falling prices, analysts say supply is not forced to align with demand and a cycle of surplus from overproduction can ensue.

In Silva's written statement at the close of the week-long conference, which will next convene in March 2014 in London, he said, "the current steep fall in prices risks once again creating the conditions of a coffee crisis not unlike the one seen at the turn of the century."

In 2001, prices for coffee plunged to 44 U.S. cents/lb after producer countries decided to end an international agreement to retain coffee by limiting exports to support prices. At the time Brazil had built up massive stocks of surplus coffee in excess of 17 million bags. The so-called retention plan only pushed prices lower, many analysts say.

"Today we face equally daunting challenges that must be addressed, albeit firmly rooted in the economic, social and political realities of our times. We do not look back to our past with nostalgia for a by-gone era of export quotas and hard-wired market intervention," Silva said in his statement.

By ICO's estimates, the world will produce 144.4 million bags of coffee this year, a 7.6 percent increase in output from last season. This far outstrips demand growth of just over 2 percent per year, according to the organization's estimates.

When asked if the ICO believed the world was producing coffee at levels beyond demand and thus risking surplus, the organization's chief of operations, Mauricio Galindo, said the "market was adjusting to new supply and demand fundamentals."

"We can expect export flows to be a challenge (to prices) but we are looking at demand in the future. The emerging market has grown to account for more than 50 percent of global coffee consumption and growth of the U.S. economy will begin to come back," he said.

U.S. coffee consumption expanded 1 percent this year and European consumption by 0.6 percent, compared with emerging market consumption grow that expanded 4.7 percent.

"Coffee consumption from the emerging market will put pressure on robusta supplies due to the demand for instant coffees," Galindo said.

The Agriculture Ministry last launched a coffee stock building program in 2009, when prices sank to $1.70/lb. It served to support prices and producers' incomes until 2010 when prices recovered. But the government made no effort to sell bags stacked in federal warehouses back onto the market when coffee pierced $3/lb in 2011.

"It's a very politically sensitive subject," the ICO delegate from Colombia, Juan Esteban Orduz, said. (Reporting by Reese Ewing)

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