| BELO HORIZONTE, Brazil, Sept 12
BELO HORIZONTE, Brazil, Sept 12 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,
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)