Brazil Subsidizes 4 Million Bags of Coffee at Auction

By Carlos Caminada

(Bloomberg) -- Brazil, the world's biggest coffee grower, agreed to subsidize all 4 million bags of beans offered at an auction after a currency rally eroded export profits.

Brazil will pay growers a subsidy of 39.99 reais ($20.40) a bag to supplement prices paid by roasters and exporters, the Agriculture Ministry said. Today's auction was the first time the government offered to support prices for coffee since 2002.

The Brazilian real has surged 59 percent in three years, the best performance against the dollar of the 16 most-traded currencies. The rally has narrowed exporters' profit margins.

``The price that producers are getting in the market is pretty close to production costs,'' said Daiana Braga, an analyst at the University of Sao Paulo's agricultural commodities research unit, known as Cepea. ``They get a much better deal at the auction.''

The government guaranteed arabica growers would receive 300 reais per 60-kilogram bag at the auction. To qualify for the subsidy, growers had to agree to sell the beans to roasters and exporters at a minimum price of 260 reais per bag.

The average price of arabica in the south of Minas Gerais state, Brazil's biggest coffee-producing region, was 232.83 reais yesterday, down 20 percent this year, according to Cepea.

Brazil said when it announced the auctions that it would subsidize as many as 5 million bags. The Agriculture ministry plans to hold an auction for the remaining 1 million bags next month.

Coffee futures for September fell 0.1 cent to $1.1180 a pound at 12:15 p.m. on the New York Board of Trade. The price has gained 17 percent in the past year through yesterday.

To contact the reporter on this story: Carlos Caminada in Sao Paulo at at ccaminada1@bloomberg.net

Last Updated: June 27, 2007 12:15 EDT