Industry woes could keep orange juice prices high

by Agrimoney.com

This rally in orange juice prices will be different, in not ending in a severe correction, Rabobank said, citing raised costs, and the potential for the birth of a new force in the industry.

It is "not at all certain" that orange juice futures - which in closing at 185.35 cents a pound in New York on Friday remained within 5 cents of a four-year high – will decline as supplies recover from 2010 levels, which were the lowest in a decade.

Indeed, any dip would only prove "temporary", given "structural change" in both the main producing areas, the US state of Florida, and the Brazilian state of Sao Paolo, Rabobank analyst Francois Sonneville said.

Florida's production has near-halved since 1999 thanks to the appeal of cashing in on real estate prices, while weakening margins from orange growing have dissuaded investment in groves.

The proportion of Florida orange trees aged over 14 has doubled to more than 60% so far this century, lowering production potential, and prompting Florida Department of Citrus officials to forecast a drop of a further 30% in the state's orange output could be on the cards by 2017-18.

"The average age of trees has already risen to critical levels, and without investments, we will see a severe structural decline in orange supply in the coming years, regardless of weather conditions."

'Low profitability'

Sao Paolo growers have been hurt by raised costs, swollen by hikes in Brazil's minimum wage, and the appreciating real.

In US dollar terms, Brazil's minimum wage is, at more than $300 a month, six times bigger than it was eight years ago.

The cost of the 6.8 kilogrammes of fresh oranges needed to produce 1 kilogramme of solid frozen concentrated orange juice has doubled over that period to $0.92, an increase which the industry has struggled to pass on fully to the consumer.

"For farmers, the profitability of orange production has been low and volatile, making alternatives such as such cane production or selling out to project developers more attractive," Mr Sonneville said.

'Higher for longer'

"History suggests that price will decrease once demand slows [thanks to higher prices] and orange yields recover," he said.

"However, history may now prove a poor guide."

Prices were likely to stay "higher for longer" and, could remain elevated "for the next decade".

The new Brazil?

Such an outcome could bring some solution to the supply squeeze by fostering the development of orange output in a lower-cost country, just as Brazil's industry followed on in the 1970s from Florida's, Mr Sonneville added, noting China, Indonesia Italy, Mexico and Spain, which already have notable citrus industries, as potential alternatives.

Mexico was "particularly interesting" given the that its minimum wage is lower than Brazil's and because its juice is not subject, like its Latin American rival's, to import duties to enter the huge US market.

"With sufficient investment, Mexico could develop in the way Brazil did," given that its yields, while currently less than half those in Brazil, were only some 20% adrift in the 1960s.

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