Orange Juice Futures sweetness fall on market uncertainties

by Commodity Online

Orange juice prices have been on the rise for the last two years, expanding almost 150 percent, as bad weather conditions affected outputs of major orange producing nations. Besides the fact that orange juice prices almost tripled, price movement was noted to be inside the range the markets have observed for the last 25 years, noted a report from RaboBank.

The worry, however, is not only affiliated with rising prices, but the structural changes happening in the market that could render the price inflation of orange juice permanent.

The price rise was mostly due to the fall in production in Sao Paolo and Florida in 2010, but expectations of a rebound in production this year, although too early to tell, is sure to bring prices down.

Declining ProductionHowever, a continuously falling production, which fell 50 percent since 1999 in Florida, is one of the focal points of the issue, according to the report from Rabobank. The traders are wary, and expectations that the market will reverse once it neared the upper ceiling of the range, inside of which prices have been trading for 25 years, is low.

The report also showed that availability of concentrated orange juice declined to the lowest in 10 years in 2010.

Cultivation of oranges depend on the acreage, trees per acre and yield per tree, all of which is reported to have remained more or less the same in Brazil and Florida, the report from Rabobank says. But the acreage is falling continuously in Florida and is a serious source of concern.

Cost PushRising labour charges, increasing spending on fertilizers and diseases have compounded the cost to produce oranges. But higher yields protected farmers earlier from such increments in cost. However, that ceases to exist now as the yield largely remained flat since 1991. This exposes farmers to price fluctuations, Rabobank report shows.

Fertilizers have also contributed a great deal to the cost, although prices have fallen of the late, but remains to be higher than 2003/04 levels.

The cost of producing oranges during 2003/04 were only at 0.60 for delivering oranges at a processing plant in Brazil, which has now increased to 0.90 for 6.8 kilograms of orange, the report cites.

Cost pressures and the volatility in orange prices have stressed the value chain, resulting in farmers benefitting little from the system. These lead farmers away to other sources of revenue such as sugar cane cultivation. Planting new trees have also resultantly declined, greatly contributing to the loss in output. The report from Rabobank states Florida Department of Citrus (FDOC) estimation that production of the fruit will fall another 30 percent if they fail to plant more trees.

This problem will persist unless the costs are not passed on to the customers, notes the report.

Other SourcesOther producers of orange include Mexico, Indonesia, China, Italy and Spain, all of which has yet to come into the market as a major producer. The US and Brazil continues to dominate the supply with both the countries almost contributing an equal share, totalling in at 80 percent of world production.

ConclusionThe orange juice market has an inbuilt progressive price structure, which is backed by firm fundamentals. The current high prices of orange are seen to come down later during the year only if production in Sao Paolo and Florida bounce back. Even if that happens, the long term structural problems such as strained value chain and the rising need for new trees to be planted needs to be dealt with.

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