Economic Hurricane Hitting Orange Juice Chain

Global Perspectives

By Marcos Fava Neves

orange juice chain

Neves

We are normally threatened by natural storms hitting the orange juice chain, some of them hurricanes. Matthew was the last one, but fortunately it remained off the coast of Florida rather than directly hitting the orange-production area.

However, the orange juice chain is facing a storm — an economic hurricane that is complicating supply and demand. Ten factors are contributing to this.

1. Production is concentrated in São Paulo and Florida. These two areas of the world were able to produce 640 million boxes of oranges approximately 10 years ago. This season, production might be 250 million boxes in Brazil and 72 million in Florida, totaling 322 million boxes. This is half of the peak.

2. Having a chain structure operating at 50 percent creates idle capacity and underused tangible and nontangible assets, which increases costs and inefficiencies. We are using only half of what we have.

3. Juice consumption declined in the last 10 years almost 20 percent (from 2.397 million tons in 2005 to 1.938 million tons in 2015). At the same time, the world’s population rose 12 percent, and per capita income increased 39 percent.

4. Since the decline in demand is much smaller than the decline in supply, global consumption will, by far, be greater than what will be produced. Therefore, current stocks of frozen concentrated orange juice (FCOJ) will come close to zero in the middle of 2017.

5. Scarcity of supply immediately provides a price reaction, and FCOJ passed the 200 cents/pound mark and will probably pass $3,000/ton in Europe.

6. Part of this cost increase can be absorbed by bottlers and retailers, but we will see price increases in most European retailers and in the United States, since part of this supply-cost increase has to be transferred to consumers.

7. We don’t know yet how consumers may react to this price increase when the major competitor of OJ — apple juice — has ample supplies available. We may see a large decline in consumption when we analyze the consumption data for 2016.

8. Production costs increased a lot in the last 10 years, while yields declined due to diseases and others issues faced by farmers. (According to a study conducted by University of Florida’s Ariel Singerman, Florida has an 80 percent greening infection rate.) Farmers are afraid of what can happen.

9. A new study released by University of Florida’s Tom Spreen shows different possible scenarios for orange production in 2026–27. In Florida, it could vary from 77 to 85 million boxes, and in São Paulo, approximately 235 million boxes. So we may not expect a very different situation than the one we face today.

10. Farmers who have produced well in this season and are selling in spot markets will make the highest profit in their history. Even with this, we don’t see investments coming back in Florida and Brazil as they should to at least match current demand.

The above 10 points make me believe that we face a perfect storm, or hurricane, in the citrus chain. We have never seen all of these factors together, which makes it more difficult to anticipate and to plan. As someone who works in strategic planning, my view of the orange juice market is that the variables are varying too much.

Marcos Fava Neves is a professor at the University of São Paulo (Brazil), international adjunct professor at Purdue University (Indiana) and author of “The Future of Food Business” (World Scientific, 2014).

Learn more from Marcos
Citrus Industry readers are invited to visit www.markestrat.org/agribusiness, where the “Global Perspectives” author, Marcos Fava Neves, posts articles, slides, analysis, research and more.

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