INTERVIEW-Brazil steers growers toward hedging as coffee cools

* Govt seeks to instill culture of price protection

* Arabica price less than half the 34-year high hit in 2011

* Higher yields, marketing key to sector's future

BRASILIA, Dec 5 (Reuters) - Leading coffee grower Brazil will sidestep a decades-old practice of buying up beans to bolster prices that have fallen sharply this year, instead encouraging producers to hedge more and boost efficiency, its top coffee official told Reuters.

Coffee futures are hovering around their lowest since June 2010, driving a nail in the coffin of a jubilant two-and-a-half-year stretch for growers in which prices held between $2 and $3 per lb and briefly hit a 34-year high of $3.0890.

In tougher times for coffee growers and as recently as early 2010, Brazil's government has thrown open its warehouse doors and bought coffee to drain off supplies and support prices - but producers hoping for the same now will be disappointed.

"If the government was going to drink all the coffee, then fair enough, but the government isn't a player (in the market)," Edilson Alcantara, the agriculture ministry director for coffee, said in an interview.

"The government doesn't have resources to pay for an acquisition through options, for now," he said.

Brazil made its 2010 purchase of about 1.5 million 60-kg bags of arabica when prices slipped close to the current level of about $1.48 per lb. But the government now wants to incite producers to embrace hedging and focus on product quality to reduce the impact of sliding prices.

That comes as Brazil's higher-quality arabica beans become eligible for the first time to be delivered to the New York-based ICE Futures U.S. commodities exchange, expanding options for growers to fix prices before harvest.

Dealers do not expect Brazilian beans to be tendered to ICE for March delivery as they continue to receive a better price on the physical market. ICE has set the price for Brazilian beans at 9 cents per lb below the benchmark.

ROLLERCOASTER RIDE

Despite being the world's leading producers of coffee, few Brazilian growers have ever adopted the business habit of using commodities futures markets to lock in or hedge some of their gains at opportune times. Traders at coffee cooperatives can carry out such transactions on members' behalf, however.

"Producers live on a rollercoaster ... We need to create a culture in which the producer protects himself. We will try to promote the use of futures," he said.

Brazil's BM&FBovespa commodities exchange offers "mini" futures contracts for small growers enabling them to hedge as few as 10 bags of arabica, and the government offers subsidized loans to cover fees for growers entering into options contracts.

So far this year, just one bank has come forward to lend the options cash, requesting only a fifth of the 50 million reais ($23.7 million) the government has made available.

"This culture (of hedging) needs to start with the banks," Alcantara said, pointing to a shortage of staff among lending institutions with adequate knowledge of hedging instruments.

The "Funcafe" pot of state-subsidized credit for coffee producers tripled funds for stocking of beans to 1.5 billion reais this year, helping growers sell cautiously, he said, rather than rushing to sell for less to raise quick cash.

Alcantara said the key to long-term economic sustainability for Brazilian coffee lay in boosting yields through research to find more-productive tree varieties and through better farming techniques.

He said better marketing to reflect the step change in quality Brazil says its producers have achieved, and to promote its growing presence in higher-end specialty coffees, would also help boost the sector's income.

"The percentage of specialty coffees sold within Brazilian coffees as a whole is growing each year ... (but) in the consumer's mind, quality coffee isn't Brazilian but rather Colombian," Alcantara said.

($1 = 2.11 reais)

(Reporting by Peter Murphy; Additional reporting by Marcy Nicholson in New York; Editing by Reese Ewing and Dale Hudson)