* Loans destined for option premiums, futures margin calls
* Funds would come from Funcafe subsidized credit system
* Margin payments on futures swell with coffee price rally
Brazil's government plans to begin offering loans to coffee farmers to cover the cost of using hedging instruments, including margin payments on futures and option premiums, a senior coffee official told Reuters.
The government will make a total of 50 million reais ($30 million) available in loans in an effort to increase access to these more sophisticated price protection mechanisms which have grown costlier to hold amid steep rally in coffee prices.
"This is to give some financial muscle to the producer to operate on the exchange. It's a way to democratize access to the hedging and futures market," said Thiago Masson, substitute director at the agriculture ministry's coffee department.
The cash may not be available until around mid-year, and must be approved by a monetary policy committee, but if supply constraints keep prices higher, the loans should enable more farmers to lock in the best rates they have received in years.
Masson said he expected the steep rally in prices which have more than doubled in nine months would boost demand for the financing. But he added that the new credit line in the world's top coffee producer had been planned long before that.
The Funcafe coffee credit fund will make the loans at the subsidized rate of 6.75 percent, the same charged for other loans made to cover growers' costs until harvest and sale.
Individual producers will be able to obtain the credit to hedge from local banks though some of the cash may be made available through coffee cooperatives.
"This (credit line) is good as it provides an incentive. Producers need to protect themselves against a fall in price. That's what is important right now in a scenario of volatility," said Luiz Claudio Caffagni, commodities services manager at Brazil's commodity exchange, the BM&FBovespa.
Caffagni said that at today's prices, the 50 million reais credit line, if spent solely on options premiums would be enough to hedge roughly 1.25 million bags. How far the cash would stretch for margin calls would depend on the market.
Recently in Brazil and elsewhere, some hedgers on both the producing and importing sides have been forced to abandon hedges as the rally in the coffee market causes margins payable on futures contracts to balloon. See analysis:
Around 674,000 arabica coffee contracts were traded at the Sao Paulo-based BM&FBovespa exchange last year, up 4 percent from 2009.
Brazil produced 48.1 million 60-kg bags of coffee last year and the forthcoming off-year crop to be harvested from May is expected to turn out 41.9-44.7 million bags.
New York arabica coffee futures for May delivery were trading 0.8 percent lower on Monday at $2.7220 per lb, more than double what arabica was fetching in June last year.
