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With the possibility of the US shifting to a more inflationary environment, a look at markets which are relatively cheap may be in order. Orange juice futures moved from a peak of 209.50 in March of 2007 to as low as 64.60 into February of this year. Fears of declining production ahead due to disease issues and signs of better demand have helped boost the market back up towards 100 recently, but the market is still considered relatively cheap. If the dollar continues to decline and inflation begins to exert more upward pressure on all commodity markets, OJ is likely to see some benefit. On top of the inflationary impact, supply is shrinking in the wake of low prices and disease problems in Florida. And we could be seeing a general shift towards stronger in demand. This leaves OJ as a potential “buy and hold” market into 2010.
Brazil is responsible for about 55% of the world’s OJ production and the US about 35%. Key consumers include the US, which uses about 38% of the world total, and the EU-27, which also consumes about 38%. Given the sharp rally in the Euro of the past year, this alone would be a good reason to consider investing in OJ. Declining production in the US in recent years has left Brazil as the dominant world exporter. The US is a distant second at only 10% of the world export market and has actually become a net importer. In the past decade, demand for juice in the US has declined due to stronger soda consumption and plenty of competition from beverages that contain a small percentage of various fruit juices and a large amount of water and sugar. A major push to tax sugar drinks to help lower obesity rates in the US, along with a shift to healthier diets, could cause a shift to stronger demand for pure orange juice in the future. In addition, ideas that juice will help boost immune systems for children may help raise consumption this fall, as the country braces for the first flu season with H1N1 virus. Looking at orange juice sales from key US retail outlets in the US, as provided by the Florida Department of Citrus, the latest 4-week period ending August 29th orange juice sales totals were 3.8% higher than the same 4-week total a year ago. Retail prices were down 8.2% for the same period.
From a supply point of view, the market will face the first key report of the year on October 9th, when the USDA releases its first estimate for the 2009/10 US orange production. Traders will be focusing on the Florida production number primarily. Last week, the USDA indicated that commercial citrus acreage in Florida has fallen 1.3% (568,814 acres) from last year, as growers have been fighting citrus greening (an insect-borne bacterial disease which first appeared in 2005) and also citrus canker. Brazil’s production has stabilized near 350-360 million boxes over the past ten years. US production last year was 162.1 million boxes. Even though the Florida acreage number is lower than last year, the decline is not as steep as previously expected. Before last week’s update, estimates were ranging from 141 to 154 million boxes. After the update, traders were revising their estimates higher.
The lack of a hurricane threat to the Florida crop this year and speculative long liquidation selling drove the market down sharply to the September 11th lows. The fact that the market was able to hold above this level after the recent acreage report could be seen as a positive development. The market is approaching a season where production is expected to fall, and demand might be on the rise for the first time in a long time. Funds still hold a hefty net long position of 9,300 contracts, so the market should remain vulnerable to choppy and volatile trade ahead of and just after the October 9th production report.
