USDA flags losses facing Brazilian coffee growers

Arabica coffee growers in Brazil are struggling with production costs massively higher than the market is offering in prices, highlighting the crisis which is prompting them to demand further government support.

Production costs as measured in Guaxupe, in Minas Gerais, Brazil's top coffee-growing state, have risen 12% to 187.56 cents a pound in 2013-14, according to the US Department of Agriculture's Brasilia bureau.

The increase is "mainly due to higher fixed and after-harvest costs", the bureau said, highlighting bigger charges for factors such as insurance, transport and depreciation.

And it is significantly higher than the market price of arabica coffee, for which the bureau flagged an estimate of 242.68 reais per 60 kilogramme bag, equivalent to $106 per bag, or $0.80 per pound.

New York futures closed on Friday at 105.75 cents per pound, equivalent to $181 per bag – implying, on the face of it, that Brazil's growers will lose more than $4bn.

More support?

The data underline the difficulties that low coffee prices are presenting to an important part of Brazil's rural economy.

Indeed, growers have sent the government a so-called "coffee pact" demanding support including government stock-building to a level equivalent to 50% of exports, and encouraging the ability of growers to be able to pay off some debts in coffee rather than cash.

Brazil's government has already released R$1bn to buy 3m bags at R$343.00 per bag through an options programme, with the contracts selling at auction for R$1.715-7.70 per bag.

However, it is believed to be considering fresh measures, which could be announced this week.

'Worse quality'

The comments came as the bureau pegged Brazil's overall coffee output in 2013-14 at 53.1m bags, down 600,000 bags compared with its previous forecast, but well above the 47.5m bags at which Brazil's Conab pegs the harvest.

The USDA bureau put the arabica harvest at 39.2 m bags, with robusta output hitting 13.9m bags.

USDA officials have a history of disputing Conab coffee data, which they say typically largely underestimates production, and do not fit to a credible balance sheet.

"According to the industry, the overall quality of the 2013 crop is worse than the previous year due to weather problems, eg dry spells in January/February and rainfall during May/July in many growing areas," the bureau said.