Orange-juice futures are due for a spill.
Just when it seemed that years of declining demand for the onetime breakfast-food staple would never stop battering prices in the tiny frozen concentrated orange-juice futures market, the bulls ran wild. But now the market is ripe for a fall.
Since Oct. 9, when the U.S. Department of Agriculture released its first forecast of the season that began Oct. 1 for Florida oranges, which are used in U.S. juice, prices for the nectar have skyrocketed 21%, to $1.3385 a pound on the idea that there might not be enough oranges to go around.
At 80 million boxes of oranges, the government forecast a 17% drop in production from last year—the smallest crop for the state since 1963. A disease called “citrus greening” has been destroying Florida’s orange groves, blocking nutrients from reaching ripening fruit, which eventually drops before it is fully mature.
One 90-pound box yields about 1.61 gallons of juice.
The disease, which has been around for a decade, is difficult to fight and spreads easily as pests carrying it fly from grove to grove. Traders saw the sharp decrease in production as a sign that the citrus industry is giving up on the fruit in favor of more-lucrative ventures. More than 100,000 acres of orange groves in Florida have been “abandoned,” according to the Florida Department of Agriculture and Consumer Services, as growers battle with smaller profits from groves that produce less fruit.
BUT BEWARE JUMPING ON THE TRAIN that has been driving prices higher.
“This is a market trying to find a new equilibrium price,” says Joe Nikruto, senior market strategist at brokerage RJO Futures in Chicago.
With fewer people sitting down to breakfast and a surge of popular competitors in the market, including smoothies and energy drinks, consumer demand for orange juice has been steadily dropping for 2½ years.
In July, orange-juice sales reached their lowest levels on record at a time when retailers have been driving up prices, further eating into demand. That has stockpiles of the frozen liquid growing.
Consumers bought 35.29 million gallons of orange juice in the four weeks ended on Oct. 3, down 3.1% from the same four-week period a year earlier.
In August, at the request of Florida Citrus Mutual, an association that promotes the interest of citrus growers in Florida, the USDA purchased $20 million of surplus orange juice to prop up prices, removing 2.5% of frozen concentrated orange-juice supply from the market.
That represents about six million pounds, or about a week’s worth of juice.
Kevin Sharpe, owner of Basic Commodities in Winter Park, Fla., said orange-juice prices probably never should have gotten below $1.20 a pound in the first place, but that in thinly traded markets like orange juice, price swings are overdone.
Prices may go as high as $1.55 a pound, he said, but citrus greening shouldn’t be news to anyone in this market, which means there’s a risk that prices drop sharply to $1 as the market overcorrect.
“Yes, we have decreasing production numbers coming out of Florida here,” he said. “But that’s been a trend for years.”