* Robusta output seen worsening in 2017
* Warehouses expected to close
* Olam executive says warehouse at 25 pct capacity
By Reese Ewing
SAO PAULO, Sept 27 (Reuters) - Brazil's robusta coffee industry is laying off workers who transport, process and store the commodity in warehouses that are nearly idle two years into the worst drought in eight decades, according to traders and industry executives.
Though prices have never been higher at 427 to 434 reais (US$132-$134) per bag for conilon, the variety of robusta grown in Brazil, producers expect another bad crop in 2017 as they tear up trees ruined by drought. At current prices, Brazil's 2016 robusta crop is worth $1.2 billion.
Exports of conilon are down 90 percent over the past 12 months versus the previous year, the coffee exporters association Cecafe said.
Despite a major recovery in arabica production in the surrounding regions due to the return of rains, the 2016 conilon crop in the main producer state, Espirito Santo, has fallen 40 percent to 5.95 million bags since peaking in 2014.
"Warehouses and segments of the coffee industry here are putting employees on leave and transferring some to other areas," said Luis Polese, president of coffee trade association Sindicafe. "Unfortunately, less skilled workers are being let go." He could not say how many workers have been laid off.
Conilon makes up about a quarter of Brazil's coffee crop but is the staple coffee consumed on the domestic market, second only in size to the United States.
Brazil's exports of conilon pale in comparison to arabica shipments. However, after the robusta crop in top supplier Vietnam declined over the past year, Brazil's exports of conilon have become more important for global supply.
November robusta futures are at their highest in a year and a half.
The drought was throwing all infrastructure linked to the coffee production into crisis, including transporters, exporters and roasters, officials said.
"We're having a hard time securing raw material to supply the local roasting industry," said Egidio Malanquini, president of the roasting industry association Sincafe.
Brazil is in its worst economic recession since the 1930s. Last week, the Labor Ministry said the economy was contracting for the second straight year and had shed a net 33,953 jobs in August.
Brazil's economy is expected to shrink more than 3 percent for a second straight year in 2016, with over 11 million workers officially considered unemployed.
Damage from the drought appears to be worsening.
Although Espirito Santo forced irrigated coffee farms to ration water early in 2016, the state capital of Vitoria began restricting water supplies in 58 neighborhoods last week for the first time in its history.
Two main rivers, the Santa Maria and Jacu, are below critical levels and 20 other municipalities are in a state of emergency due to the water crisis, Eduardo Carvalhaes at trader Escritorio Carvalhaes in Santos said.
Octaciano Neto, the farm secretary in Espirito Santo, said some regions have seen less than half their normal rainfall for the third year running.
Polese said multinationals like Louis Dreyfus, Olam and Volcafe are experiencing drastic declines in the flow of coffee through their warehouses versus recent years, little more than a couple of months after harvest was completed.
"Olam's warehouse in Nova Venecia is running at a fraction of capacity. Volcafe, a leader in coffee, leased two warehouses in Colatina, which are moving coffee at 20 percent capacity," Polese said.
Another trader in the state, who asked not to be named, said a Louis Dreyfus Company was holding 60,000 to 80,000 bags of coffee in its 250,000-bag warehouse in Nova Venecia. The company did not respond to a request for comment.
Volcafe said it continued to invest and hire in the region despite drought damage to the crop. An Olam executive in Brazil said its warehouse was running at 25 percent capacity.
President of the Vitoria Coffee Exchange CCCV Jorge Luiz Nicchio said he expected some warehouses would close soon given poor prospects for next year's crop.
"Producers are tearing up trees that are so badly damaged they don't expect them to recover," he told Reuters.
Crop analysts INTL FCStone said last week that prospects for conilon in Espirito Santo in 2017 were "extremely worrisome" and expected to be worse than this year.
Reporting by Reese Ewing; Editing by Toni Reinhold