Pulp friction

by Ron Sterk
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Frozen concentrated orange juice futures traded on ICE Futures U.S. hit record highs early last week and saw wide price swings on a combination of concerns over frost damage to the Florida crop and a potential loss of supply due to the discovery of an unapproved fungicide in imports from Brazil, the world’s largest juice exporter and the source of about 10% of U.S. supply.

Brazil accounts for about 60% of world orange juice production and 80% of global exports, according to data from the Foreign Agricultural Service of the U.S. Department of Agriculture. The United States produces about 30% of the world juice supply but less than 10% is exported because of higher domestic consumption. U.S. orange juice exports were a record high 214 million single-strength equivalent (s.s.e.)
gallons in 2010-11, which equaled only 14% of the Brazilian export total that year.

U.S. orange juice consumption was forecast by the U.S.D.A. at 1,050 million s.s.e gallons in 2011-12 (October-September), of which 285 million s.s.e. gallons, or 27%, was expected to come from imports with 40% to 50% of those from Brazil and about 30% from Mexico.

The fireworks started Jan. 9 as forecasts of freezing temperatures in Florida citrus areas sent the most heavily traded March 2012 contract up the 10c-a-lb daily limit to a five-month high of $1.87¾ a lb after also having gained 5% on reports of freeze damage a week earlier.

News on Jan. 10 of testing for the unapproved fungicide and concern about supply again sent prices limit up, this time 20c a lb as the limit expands the day after a limit move. Prices rose about 10% with March closing at $2.07¾ a lb and spot January at a record $2.12¾ a lb. At the end of trading Jan. 10 futures prices had risen about 25% in six trading days.

On Jan. 11 futures prices plunged 19.55@20c a lb, or about 10%, as the market “decided” the fungicide concern may have been overblown. But after the market closed, the Food and Drug Administration said it was holding all orange juice imports pending test results.

The Coca-Cola Co., the Atlanta-based producer of Minute Maid orange juice, said on Jan. 11 it had informed the F.D.A. it had discovered the use of carbendazim by Brazilian growers and had detected low levels of it in its own and competitors orange juice in late December. Coca-Cola along with competitor PepsiCo, Inc., Purchase, N.Y., the maker of Tropicana, account for about two-thirds of U.S. retail orange juice sales that may include imported juice. Carbendazim is approved for use and is widely used on orange crops in Brazil but is not approved for use on food products in the United States, although it was allowed for use on U.S. citrus from 2002-08.

The F.D.A. said it had been testing imported orange juice for carbendazim since Jan. 4. On Jan. 11 it released some imports from Canada, which accounts for less than 1% of U.S. imports, but still was holding other shipments from Canada as well as from Mexico and Brazil pending test results that were expected by mid-January. The F.D.A. indicated it would block any imports that tested at or above 10 parts per billion for carbendazim and that some samples had tested as high as 35 p.p.b. The European Union allows carbendazim residue up to 200 p.p.b. on oranges.

The risk assessment con-ducted by the Environmental Protection Agency indicated 80 p.p.b. of carbendazim may be allowed on the market and did not pose a health threat.

ICE Futures U.S. last week nearly doubled margin requirements for the orange juice contract. It also raised margins on cocoa contracts. Ironically, on Jan. 6 the exchange indicated it was going to lower margin requirements.

In addition to the fungicide and weather issues, the U.S.D.A. on Jan. 12 released its already-scheduled forecast of 2011-12 U.S. orange production. The U.S.D.A. forecast Florida orange production at 6,615,000 tons (147 million 90-lb boxes), down 2% from its December forecast but up 5% from 6,314,000 tons in 2010-11. Florida’s frozen concentrated orange juice yield was forecast at 1.56 gallons per box at 42.0 degrees Brix, down 3% from the December forecast and down 2% from last season’s final yield of 1.59 gallons. The U.S.D.A. estimate was at the low end of trade expectations, but traders said they expected another reduction in the next U.S.D.A. report to reflect the recent freeze damage.

Orange juice futures prices opened lower on Jan. 12 closed down as much as the original 10c-a-lb limit as calm appeared to replace earlier fears in the usually thinly traded market. The wide price moves much of last week likely were heightened by tight orange juice stocks in the United States and Brazil, with the Jan. 12 U.S.D.A. crop estimate indicating lower output and still more tightening was likely in the United States.
U.S. stocks of frozen orange juice concentrate on Nov. 30 were 479,561,000 lbs (48,460,000 gallons), down 8% from October and down 40% from November 2010, the U.S.D.A. said in its Cold Storage report.
In its December Fruit and Tree Nuts Outlook, the U.S.D.A. forecast U.S. 2011-12 (October-September) orange juice production at 952 million s.s.e. gallons, up 4% from 2010-11 and up 13% from 2009-10 but still 2% below the five-year average. The increase was the result of projected higher 2011-12 Florida orange production and increased juice yield (based on December data). U.S. 2011-12 orange juice beginning stocks were forecast at 407 million s.s.e. gallons, down 27% from a year earlier.

The U.S.D.A. in December forecast Brazil’s 2011-12 orange juice production at 2,005 million s.s.e. gallons, up 31% from 2010-11 and the highest since 2007-08. Production had declined the prior three years and Brazil entered 2011-12 with historically low stocks of 6 million s.s.e. gallons, down 97% from a year earlier, following drought in its major growing region. Although Brazilian 2011-12 exports were forecast at 1,727 million s.s.e. gallons, up 4% from 2010-11, the U.S.D.A. said much of the increased production would be used to rebuild stock levels.

The situation still was developing at week’s end, and it was unclear what the final impact would be on orange juice supply, on futures and cash prices and on consumers. While higher prices for U.S. orange juice may benefit orange growers, they also may further dampen per capita consumption in the United States which has been steadily declining over the past decade.

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