Sao Paulo, July 22 - Brazil will buy as much as 3 million 60-kg bags of export-grade coffee from its farmers this season at rates well-above current market prices in an effort to force private buyers to pay more to compete for supplies.
The agriculture ministry's crop supply agency Conab held a second and final auction on Wednesday to sell option contracts to producers. Holders are entitled to deliver their coffee to the government unless the regular market can beat its offer.
Three lots of options covering 2 million bags of coffee from the world's top producer were sold on Wednesday, and though all found buyers, demand appeared to have cooled since a first auction last week of contracts covering 1 million bags.
In that first auction, the price rose to six times the opening bid, or 9.5 reais per bag, while this week, each of the three lots was sold at just one Brazilian cent more than the starting rate, ending at 1.5451 to 1.5721 reais a bag.
Each contract covers 100 bags.
"There were more contracts (offered) this week so there wasn't as much of a battle for them," said a technician overseeing the auction at governmental crop supply agency Conab.
Wednesday's lots were auctioned off in less than one hour. Differing from regular auctions, the auctioneers continue to raise the price incrementally until the offers of those still making bids exactly match the quantity on sale.
With the sale of the contracts, the government has revived a long-abandoned practice of buying physical coffee to tighten supplies and to force buyers to pay more for the coffee if they want to secure it first.
Producers would most likely not exercise the option contracts at all if market prices rise above what the government has committed to pay. The contracts expire at dates between November and March depending on the lot.
This corresponds to one of the busiest times of year for sales of coffee from the world's top producer.
The total of 3 million bags covered by the price guarantee equates to about a tenth of this year's expected arabica output. About a quarter of Brazil's coffee is of the robusta variety.
Exporters say government intervention usually makes it more difficult to source supplies and can reduce Brazil's competitiveness by nudging the price higher.