Higher Coffee Price Trips Cut-Off Switch For Colombia Subsidy


Colombian coffee growers, who last year received about half of their income from government subsidies to prop them up during a slump in prices, did not receive a penny of state aid on Monday, but they may not even care.

Arabica futures surged on Monday in Chicago to a 16-month high of around $1.793 per lb, nudging local rates above a 700,000 peso ($340) per 125 kg (275.6 lbs) bag cut-off point beyond which the subsidy is suspended, the first time this has happened since the subsidy was launched in October 2012.

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"There won't be any subsidy paid today," said an employee at the farmer-funded National Coffee Growers' Federation, which on Monday reported prices of between 707,875 pesos per bag and a higher rate of 711,500 in a coastal region with lower transport costs.

The breathtaking surge of nearly 60 percent in arabica prices since Jan. 1, has been amplified by a simultaneous 6-percent weakening in Colombia's peso currency, putting more pesos in growers' hands when they exchange the dollars earned from their exports.

By comparison, the highest price paid in any Colombian growing region on Dec. 16 was 413,875 pesos, obliging the government to pay the maximum level of 165,000 pesos in subsidy form. Less is paid if the market price plus the subsidy would take earnings over 700,000 pesos.


Behind the surge are fears about the still undetermined damage to the coffee crop in the world's top grower Brazil after weeks of drought and baking heat, coupled with the prospect of even deeper losses to Central America's crop than last year due to roya fungus.

As a result, coffee is now by far the best-performing commodity so far this year on the 19-market Thomson Reuters/CoreCommodity CRB Index, turning fortunes around for those with coffee to sell. The currency of world top coffee grower Brazil, the real, weakened about 15 percent over the past 12 months before rebounding slightly in recent weeks.

The notoriously volatile market had slid around 65 percent over the challenging last 2-1/2 years for coffee farmers, falling below the cost of production in Colombia, the world's biggest producer of high-quality washed arabica beans.

Expectations of an abundant crop from Brazil and a large global surplus drove prices to a seven-year low near $1 per lb in November, but fears over Brazil's drought in recent weeks quickly flipped it into a bull market.

A pause in subsidy payments will likely come as a relief to the government as analysts say its 1 trillion peso budget for subsidy payments in 2014 might not have been enough to cover the entire crop if output rises to around 11.3 million 60-kg bags as the Coffee Growers' Federation expects.

The subsidy will automatically resume when coffee is sold below 700,000 pesos, with the government topping up whatever is needed to bring growers' income to that price, up to a maximum of 165,000 pesos.

Colombia's coffee production has rebounded after a run of smaller harvests from 2008 to 2012 caused by roya or leaf-rust fungus and bad weather. Widespread replanting with trees resistant to roya helped output surge 41 percent in 2013 to 10.9 million bags.

($1 = 2,043.2800 Colombian pesos)

(By Peter Murphy; Additional reporting by Marcy Nicholson; editing by G Crosse)