The Brazilian government has authorized the sale of 60 percent of public coffee stocks in biweekly auctions to help ease supply concerns and high prices caused by drought, crop supply agency Conab said on Thursday. Conab plans to hold regular auctions every two weeks to sell off 827,666 bags of stockpiled government coffee through the year, Jose Portugal, superintendent of operations at the agency's auctions department told Reuters.
Conab announced on Monday that it would resume coffee auctions on Friday with the sale of 67,000 bags of arabica. The agency, however, faces an uphill battle. In auctions in late 2015 and early 2016 sales were weak and had little impact on prices. After the severe drought in Brazil's main robusta state of Espirito Santo slashed output by roughly 30 percent, prices of the bean have pressured consumer inflation.
Robusta, or conillon as it is known locally, is largely consumed in Brazil while arabicas make up the bulk of coffee exports. Protection of producers with bans on green coffee imports from other origins also makes the impact of local supply shortfalls acute. "Depending on the market reaction to the first auctions, adjustments in dates and quantities of future auctions may be made," Conab said in an email to Reuters.
The agency, which regularly stockpiles and sells strategic reserves of widely used food commodities in an effort to smooth out price peaks and troughs, faces a challenging year after drought slashed coffee and corn output in one of the world's leading food commodity producers.
Although stocks of both crops are nothing to laugh at, Brazil is such a large producer of coffee and corn that holdings in government warehouses are barely a drop in the bucket compared to the total volume of private sector business. Conab's coffee stocks stand at 1.37 million 60 kg bags, the lowest in several decades, while corn stocks stand at 875,834 tonnes. The country harvests roughly 55 million bags of coffee a year normally and some 80 million tonnes of corn.
"Government stocks are small, so the market will absorb these auctions without pressure to bring down prices," said a small coffee producer in southern Minas Gerais, Marco Antonio Jacob. Drought has caused prices for corn to spike earlier in 2016 to record levels. Even in the peak of harvesting the winter corn crop, prices are still twice what they were last year. Pork and poultry producers, the bulk of whose costs are corn, have been forced to import from Argentina, shut down capacity and push up consumer inflation.
Conab's corn auctions have had little impact on domestic prices, even though other major producers such as the United States is awash with the grain and prices are so low ethanol producers there are ramping up production.
The weak real to the dollar has exasperated the pressure on local prices as more farm output flows abroad. Conab has a thankless task, even when it manages to smooth out prices. Cries from producers bitter that the government is interfering with market prices often creates political backlash for the agency, analysts said. The government often has to balance between losing support from consumers because of inflation or the rural block in Congress for weakening the earning power of their constituents. In the current battle, leaders will likely struggle more to contain prices. "Any impact on coffee prices will likely be reversed. It's only a matter of time for prices to climb higher," Jacob said.