April 4, 2019 / 7:06 PM / 14 days ago

Exclusive: Brazil weighs offering coffee options to support prices - sources

SAO PAULO (Reuters) - The Brazilian government is considering offering put options to coffee producers as a way to shore up prices at a 13-year low and assure a minimum income for struggling farmers, two people with knowledge of the talks told Reuters on Thursday.

FILE PHOTO: The robusta coffee fruits are seen in Sao Gabriel da Palha, Espirito Santo state, Brazil May 2, 2018. REUTERS/Jose Roberto Gomes

The program, if approved, would give producers the right to sell their crops to the government at a fixed price, setting a floor for coffee prices in the world’s largest coffee producer and exporter. That would likely force buyers to pay more for Brazilian coffee and encourage other coffee-growing countries to follow suit.

Producers have been pressuring Brasilia to offer put options and rebuild government bean inventories that had been sold off earlier this decade.

“We have talked to the government and they liked the idea,” a director at a Brazilian coffee cooperative told Reuters.

“It would be a win-win program. Farmers can be guaranteed better prices, and the government can later profit from the sales of that coffee when prices recover,” he said.

Another industry source said he had also heard about the talks from producers that he advises. That source said that many details still needed to be worked out, such as the program’s size and the level of the price floor.

The sources asked for anonymity because they were not authorized to speak publicly about the issue.

Brazil’s Agriculture Ministry did not respond to a request for comment.

Coffee prices in New York hit a fresh 13-year low this week as output surpasses demand in the global market. Arabica prices were trading at 95.20 cents per pound on Thursday, down 0.16 percent.

The Brazilian government has been active in the coffee market in the past, intervening with policies to help farmers when market prices were at or below production costs.

Brazil last used options in 2013, when it offered contracts for farmers to sell up to 3 million bags to the government at a fixed price. The put options required coffee producers to pay a small fee for the right to sell their coffee to the government.

If market prices are below the fixed price set for the options when they expire, the producer normally exercises the option and delivers the product to government warehouses.

The Brazilian government sold off the beans acquired in the 2013 program when prices recovered and by 2017 had eliminated its coffee inventories.

One obstacle for the program would be the potential cost to the government of billions of reais at a moment when President Jair Bolsonaro has pledged to rein in public spending and reduce a large budget deficit.

Slideshow (3 Images)

Even if the Agriculture Ministry agrees to the idea, it would have to pass muster with Economy Minister Paulo Guedes, who has vowed to cut industry-specific subsidies, before getting Bolsonaro’s signature.

The first source said the idea would be to launch the program in 2020, when Brazil is expected to produce a larger crop, based on its biennial coffee production cycle.

2019 is an off-year for Brazil’s coffee fields, and the government expects production to fall to between 50.5 million and 54.5 million 60-kg bags from the record of 61.6 million bags produced in 2018.

Reporting by Marcelo Teixeira; Editing by Brad Brooks, Brad Haynes, Phil Berlowitz

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