From the folks at www.jurojinweekly.com website

INTO EACH LIFE SOME RAIN MUST FALL

The convenience of converting frozen orange juice concentrate into juice rather than squeezing oranges at home is a good example of how technology in the agriculture industry has helped convert a low revenue industry into an enormous one. By the turn of the century the frozen concentrate orange juice (FCOJ) market was worth $1.3 billion annually. Back in 1945 the Florida Department of Citrus invented the process and three years later sold the patent to the U.S. government. It was this step that helped to make the frozen food industry commercially viable.

But since 2000 according to the USDA’s National Agricultural Statistics Service, acreage given over to American production of oranges has fallen from 820,000 acres to just 660,000. As a result production of 13 million tons in 2000 fell to 10.1 million in the 2008 crop.

Prices too have dropped and in the current futures market at around 80 cents per pound, FCOJ futures prices are at almost half the $1.50 per pound of about one year ago. That’s bad news for citrus growers who could sell a box of oranges for $6.20 in March 2008, but could only fetch $5.06 last month. In the bigger picture they are still achieving 36 cents per box less than the average price of 1990-92. And that’s before allowing for inflation!

There are a couple of things going on. First of all, orange juice, although far more palatable than crude oil, is still just another commodity. Its price is subject to supply and demand factors and despite the bigger picture contraction in U.S. supply, global capacity has picked up. Other regions, notably Brazil, dictate the price of juice more so than the Florida grove growers do. Florida, by the way produces around 77% of all oranges used for pressing while Californian oranges, which are typically better to eat make up 21% of what goes into the big squeeze.

As an overhang of last year’s global crop there was more of an inventory than usual and so despite expectations of a similar 51 million ton crop in 2009, unchanged from 2008, more is being carried over from last year. In addition it was earlier forecast the world’s largest producer might have a larger crop than expected and so allow it to exert heavier than usual pricing pressure. Lately, the word is that this is simply not the case and we should expect less out of Brazil this year.

As a commodity, orange juice has suffered just like any other. Don’t forget that crude oil traded down by around $110 bucks per barrel from its $147 peak last July. And so the halving of juice prices means it gets off rather lightly! But there has been another dynamic at play. While you might not think so, orange juice is still sensitive to what’s happening in the real economy. If you think about it, you’re faced with a choice in the supermarket: Buy OJ or buy apple juice or even forget them both and save a couple of dollars by drinking from the tap. Well in aggregate, that challenge to real demand has hampered the price of juice.

While both the U.S. and Egypt might be falling short in orange production there’s always someone else to plug the gap – and while in this case it might not be Brazil, expectations are than Argentina and Chile will produce more this year. On the demand side the changing tastes of European consumers has shown a preference for more exotic fruit juices, leaving demand for OJ slightly down.

In the last several weeks the consistent selling pressure in the OJ futures suddenly turned and technically speaking the turnaround is long overdue. There has been concern over Florida’s shrinking crop. Early extreme heat dry weather caused many young fruit to simply drop off the trees – yet prices continued to tumble. Signs of a classic bear market were rather evident. But the market suddenly turned as more and more days passed by when Florida went with hardly any rain increasing the potential for further crop damage.

The orange juice market is hotting up to be an interesting one heading into warmer weather now. We believe that there is a good chance that the fundamentally diminishing crop supply coupled with the pessimism conveyed in juice futures makes for solid odds that the new crop could see a significant rebound over the early part of the summer. The pick-up in enthusiasm took a nose-dive earlier this week when the clouds burst over some, but not all parts of the citrus groves in Florida.

We think that gives a good time to consider our options on FCOJ.