Coffee Supply Woes May Amplify Brazil Intervention

Jan 14 – The prospect of another Brazil coffee harvest dogged by rain and a meager outlook in other coffee-growing countries will add potency to Brazil’s efforts to raise prices by buying beans to restrict supplies.

Brazil’s government plans to buy and store up to 10 million 60-kg bags of coffee in 2009 and 2010 to help growers cope with rising costs. It is almost certain to acquire close to the 3 million bags for which it is offering the highest rates.

But when the government last year revived its long-defunct practice of buying coffee, it did not foresee the bad weather that caused quality problems for both the 2009 and forthcoming 2010 crops, leading to a dearth of export-grade coffees.

Exporters have had a tougher time finding quality coffees in the last few months after rains during the harvestspoiled last year’s pristine produce, making it hard to dry the beans to prevent fermenting.

That has pushed up the price for higher quality coffees from Brazil, and the trend is likely to continue with the prospect of another tricky Brazilian harvest to come in 2010.

Brazil-based traders Carvalhaes were quoting fine and extra fine coffees at up to 265 reais ($150) in mid-July last year but at up to 300 reais this week.

Traders are divided over how much the government purchases can strengthen the market, which may already have priced in much of the program’s effect on rates for futures contracts.

“With all that is happening, I’m surprised that the market hasn’t reached higher levels than it is at,” said Lucio Dias, trader at Cooxupe, the world’s largest coffee cooperative based in Guaxupe, in Brazil’s main coffee state Minas Gerais.

“Fine coffee supply will be very restricted for this year,” he said.

Global demand for coffee is rising steadily but weather-related problems will hobble many of the world’s producers. The Brazilian government’s purchases come at a time of lower output in many origins and low global stocks.

Colombia faces the prospect of its smallest crop in 35 years, and coffee in Mexico has suffered some frost damage. Vietnam’s robusta output also has suffered from weather problems.

Cooxupe is one of the biggest participants in an option scheme through which the government has committed to buying up to 3 million bags of coffee by March. Cooxupe bought about a fifth of the contracts to deliver more than 600,000 bags.

Through the scheme, the government should buy about 700,000 bags from the first option contract which expired in November and it could garner 2 million more, summing the quantities from contracts due on the 15th of January, February and March.