Global Outlook 2018: The orange juice slump
There has not been a year like this for more than a decade. The global orange juice industry has been grappling with falling demand in the two major markets (the US and Europe), disease, depradations caused by climate change, and just when it looked like production was going to increase – albeit minimally – in the US, hurricane Irma charged through Florida (after destroying the citrus groves in Cuba en route).
FCOJ prices, which were around USD3,000 per tonne cfr duty unpaid Rotterdam at the start of the year, had been planing gently downwards to around USD2,100/tonne. Brazil had had a reasonable orange harvest and was cautiously expecting another good one, but the effective removal of Florida from the market prompted the Brazilians, at Anuga, to hike their prices by around USD350-400/tonne. So FCOJ is still cheaper than it was at the start of 2017, but in real terms, not cheap at all.
Let us be brutal about this: Florida is, in global terms, now an irrelevance. Its production is a quarter of what it was a dozen years ago. Florida’s ace is that it produces high ratio orange juice, which Brazil has found it increasingly hard to make since it moved its citrus groves to escape disease.
In blending terms, a smallish volume of sweet Florida juice goes a long way. Florida also has a certain cachet – the name of the state is a brand in itself, which cannot be said of São Paulo or Minas Gerais. Assuming that the Brazilian production recovery is not dashed by drought or disease, then the important issue is the sourcing of high ratio juice to replace the shortfall from Florida. This is also of key importance to bottlers and lenders in Europe as well as the US.
The obvious candidate is Mexico. A few years go, the USDA was predicting the decline of Mexico as an orange juice producing country (and Foodnews, as was then, vehemently disagreed!). Now Mexico is ideally placed, and a USDA report this year gave a production figure of about 170,000 tonnes of FCOJ this season, up from 165,000 tonnes in the previous season.
This increase comes despite a forecast decline in Mexico’s orange harvest of 25,000 tonnes from the previous season’s 4.4 mln tonnes. The USDA credits the much higher price of FCOJ for the increase in processing supply. Indeed, the USDA had to revise its estimated FCOJ production up from its original 2015/16 figure of 126,600 tonnes.
The high fruit price is also curbing domestic consumption of oranges, adds the USDA, saying: “Mexico is a price-sensitive market.” National yields for 2016/17 are forecast to be slightly lower, at approximately 14.3 tonnes per hectare, compared with 2015/16’s average yields of 14.5 tonnes/ha. Regional orange yields differ widely, depending on the production area. The variation in yields is caused by many factors, including weather, frequency of fertiliser and pesticide applications, tree density, and soil quality.
The cloud on the horizon is disease. Mexico is facing significant issues with HLB. Mexico’s first detection was in 2009 and since then the National Service of Agricultural Food Safety and Quality (SENASICA) has implemented an extensive monitoring programme for the disease. HLB (greening) has been detected in 23 states and 336 municipalities. Production states, including Veracruz, Tamaulipas, San Luis Potosi, and Nuevo Leon, have had HLB detections. According to SENASICA, to date the detections for these states have only been in psyllids and not in plant material.
In Europe, there is Spain. The country’s 2016/17 orange production was forecast at 3.6 million tonnes, an increase of over 17% from the previous season due to optimal spring weather conditions which resulted in improved flowering and fruit setting. Next season’s citrus production is forecast to be much (18%) lower, but the chief category affected is grapefruit: orange production is forecast to be just 4% down (and lemons will be 13% up).
Spain has the raw material and processing capacity to make at least 70,000 tonnes of FCOJ equivalent orange juice annually, but Spain’s key product is NFC orange juice, which it supplies to other European countries. Brazil always prices its NFC juice tactically, to compete with Spain: Brazil effectively subsidises its NFC production by weighting its FCOJ price. However, Spain could produce high ratio FCOJ if the price was right, and of course there would be no duty penalty in Europe.
Other eyes are on Spain. Citrosuco has announced its intention to make NFC juice there, in a plant rented (with an option to purchase) from a Turkish company, and Prodalim, the Israeli trader-turned-processor, opened a distribution centre near the port of Valencia a couple of years ago.
Morocco is another potential source of high ratio juice. This is another producing country whose orange juice output was forecast by the USDA to be endangered, but with the high price of juice, it is enjoying a small renaissance. Morocco made about 5,500 tonnes of FCOJ this year – almost insignificant – and of its five orange juice processors, three only produce NFC juice, but Morocco grows well over 2.0 million tonnes of oranges annually (of which something over 60,000 tonnes go to industry), and it could quite easily increase production as long as the growers can provide the raw material at a reasonable cost to the processors (at present, the fresh market dominates because it pays much higher prices for fresh oranges).
Companies like SunProd in Europe, which sources FCOJ from a wide variety of Mediterranean origins, are likely to find more willing customers in the next few years. Buying FCOJ will be more expensive, as large bottlers and blenders will have to pay for smaller volumes from a number of minor suppliers, instead of just placing orders with Brazil.
Another factor that can affect prices is inventory size. Orange juice stocks in Brazil are now at a low, and those of Florida are down to around half a year’s supply. Brazil can use its inventory to control prices, to a degree. It needs carry-over stocks to blend with new season juice, and it can afford to shunt volume into storage, which will also bolster prices.
IEG Vu thinks there will be enough orange juice to go around in 2018. The present sharp increase in the price of apple juice has lessened the need to be competitive (historically, with apple and orange juices, an increase in price of one results in a switch by consumers to the other): Brazil may cut its prices in the second half of the year, if it has judged its inventories to be suitably robust for the 2018/19 season.
We reckon the Brazilians have hiked their prices, simply because they can and because AJC has also gone up in price. They can’t lose, really. Or if they decide to operate on lower inventory levels, they save money that way, especially in Brazil, where storage costs are high.
If one looks at the Brazilian export figures, there has been about an 18% drop in FCOJ exports in the last couple of years and a 13% increase in NFC exports. In tonnage terms, annualised, that means about 820,000 tonnes of FCOJ, down from about a million tonnes, and about 1.45 million tonnes of NFC, up from 1.28 million tonnes. Divide that increase in NFC exports (170,000 tonnes) by 5.5 to get a rough FCOJ equivalent, and you only get about 31,000 tonnes of FCOJ equivalent. So FCOJ exports are still weak.
FCOJ is expensive to store and may require blending and will certainly require reconstituting before bottling. It is much cheaper to ship than NFC, of course. But NFC has a higher potential profit margin.
The Brazilians have kept their NFC prices artificially low into Europe to compete against Spain (mainly) and one or two others. But with Florida out of the picture (for all intents and purposes), they will be shipping more NFC to the US. Brazil may change its NFC pricing strategy soon – basically, hike the price. The US retail figures have shown that the decline in NFC consumption is not price related, so they may as well get what they can.
The really big issue now is the shortage of high ratio juice, both NFC and FCOJ. It is like the shortage of high acid apple juice in Europe – this is the factor that’s going to push up prices. There is no real global shortage of FCOJ per se, but there is a shortage of drinkable FCOJ.
Consumption in the developed major markets will continue to fall. The sugar/obesity issue will absolutely not go away, and almost all juices will suffer from it. Orange juice, like other juices, will find itself being employed as an ingredient rather than a drink in itself. For this reason, IEG Vu thinks that US retail sales will fall (again) in the season just started.
Historically, our forecasts for the last three years have been exceptionally accurate. For the season just ended, we predicted, in our last Global Outlook, a figure of 425 million gallons. The eventual figure was just four million gallons above this. We do not think that anything has really changed in the market fundamentals and so, for the 2017/18 season, we forecast US retail sales will be 400 mln gallons.