Thomas White Global Investing
U.S.
U.S. Stamp
March 9, 2012
A Postcard from the Americas
U.S.: Fungicide fears send orange juice prices soaring

The cynosure of all eyes

The surge in orange juice price comes amid the forecast that orange production in the U.S. is set to increase 1.4% during the 2011-12 season.

The tiny orange juice market in the United States entered popular imagination with the 1983 comedy Trading Places starring Eddie Murphy. The movie portrayed the owners of a commodities brokerage trying to profit from trades in orange juice futures using illegally obtained classified information on the upcoming orange crop. The film also inspired the drafting of what has come to be known as the “Eddie Murphy rule” governing insider trading in commodities. Despite the hype and celluloid attention though, the humble vitamin-C rich beverage has rarely been in the news except during the swine flu outbreak in the winter of 2009. But now the spotlight is on. Orange juice prices hit a 34-year high in January on fears that U.S. food regulators would block imports from Brazil believed to contain a certain fungicide.

Domestic factors such as freezing temperatures in Florida, the main citrus growing area in the U.S., and a bacterial citrus disease in Texas also fueled the jump in orange juice prices. Florida, California, and Texas are the main orange producing regions in the U.S. Despite the recent surge in prices, the orange juice market in the country has been in the doldrums as consumers have been increasingly opting for alternative health drinks. An FT report said the consumption of orange juice in the country has come down by nearly a quarter during the last decade.

To put things in perspective, the orange juice industry that is based mainly in Florida is estimated to be worth about $10 billion. Though the daily turnover in the U.S. orange juice market itself comes to only about $75 million, the price of the commodity is of utmost interest to the likes of PepsiCo, which owns the Tropicana brand, and Coca-Cola, a peddler of Minute Maid and Simply Orange. In total, these products corner a 62% share of all orange juice sold at supermarkets in the United States. Encouragingly, analysts think that the scope of weather vagaries in Florida will be limited, and the Texas plant disease will not be a major cause for concern.

Despite fears of a fungicide contamination, Brazilian supplies, which account for 15% of the consumption in the U.S., are too important to be banned completely. Globally too, Brazil provides almost 60% of the world’s orange juice. Seen in this light, supply concerns seem to be warranted as inventory levels at the end of September 2011 came to 290,000 tons, which was 28% lower compared to the year before, as a Financial Times report pointed out. However, recent news from the U.S. Food and Drug Administration is heartening– 19 of the 45 import samples screened by the FDA for the presence of the fungicide carbendazim tested negative, according to the Financial Times.

Both Coca-Cola and PepsiCo have not confirmed yet if they have reported traces of the pesticide in their supplies to the U.S. food regulators. Though analysts point out that the market could be overreacting, it is clear that orange juice is the flavor of the season in soft commodities. The recent price volatility has attracted investor interest to a commodity typically confined to a dusty corner of the futures market. While the likely resolution to the issue, as an FT report said, would be that Brazilian orange producers may be asked to change the fungicide used, the U.S juice market is poised to enjoy its fleeting moments of fame. And unlike the commodity traders in Trading Places whose bet went horribly wrong, it appears now that the country’s domestic orange juice market is in the pink.

Image Credit: Michele Amato under a Creative Commons License

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