Florida has been in the eye of many storms that have hit the US Gulf. In the worst case trees are uprooted and orange groves flooded, while at best nearly ripened fruit is blown off the trees. Although hurricane forecasting has come along way over the past few decades it is still very difficult to pinpoint exactly where a storm will make landfill. As such traders in orange juice futures add a premium to prices as the hurricane season commences and especially if it looks like a storm is heading towards the state. The best month for orange juice futures prices tends to be November, right at the end of the season, as uncertainty over the extent of the damage still remains unclear.
Damage to orange trees occurs if the temperature drops below freezing and stays there for more than four hours. Market participants realise of course that severe frost is more likely during the winter and so the price of orange juice futures going into the end of the year should be high enough to reflect the probability of a freeze during the coming season.
A disease called “citrus greening” has severely hampered both Brazil’s and Florida’s orange juice industry in recent years. Greening starts at the leaves and works its way through the tree like a hardening of the arteries, blocking nutrients and water. Oranges then drop off the tree unripe and unusable. Although a genetically modified version is being developed it is likely to be many years away from being introduced. Greening — which also hurts grapefruit, limes, lemons and other citrus — has cut Florida’s output in half over the past decade, according to the U.S. Department of Agriculture.
Dry weather in the main orange juice producing regions of Brazil may also cause the supply of orange juice to decline. If drought occurs in this region it typically also affects other related ‘soft’ commodity prices like sugar and coffee.
5) The Brazilian Real
The largest global supplier of orange juice is Brazil (producing over 80% of the oranges for processing). When exports of Brazilian OJ are high this can cause the price of orange juice futures to fall. As such currency movements can have a disproportionate impact on how big exports of OJ are. An appreciation of the Brazilian currency, the Real, against the US dollar is likely to be positive for the price of orange juice futures since it is now more expensive to import Brazilian orange juice into the US than it was before.
Oranges grow on trees that require 5-15 years to mature. And so any decision by the farmer on planting does not involves long lead times, by which time the fundamentals may be very different. This means that farmers price expectations (i.e. whether they expect high or low prices to continue sometimes 3-5 years in the future) are vitally important in determining future supply and prices
Although the commodity is frozen and not very perishable, only a small amount of inventory is carried over from one year to the next. This lack of a ‘buffer’ helps to contribute to very volatile prices.
8) Consumer tastes & health concerns
Orange juice demand is being squeezed because of a shift away from sugar laden drinks and competition from other products such as flavoured water. The drop in demand can be traced back to the early 2000’s as the popularity of low carbohydrate and high protein diets surged. Changes in eating patterns has also hit demand. With fewer people eating breakfast as a sit down meal fewer families are drinking it in the morning.
The relative price of substitute products like apple juice, tomato juice and other soft drinks will influence the demand for orange juice. Meanwhile, farmers in Brazil have been tearing up orange groves and replacing them with more profitable crops such as sugar cane. As Brazilian supply becomes more important to the overall orange juice market, it is starting to become more closely related to the sugar market, which Brazil is also the major global supplier.
10) Shipping, production and logistics costs
Transportation bottlenecks when exporting orange juice out of Brazil can delay product reaching the market resulting in higher prices. Meanwhile, higher production costs (e.g. higher fuel costs) as with all farmers either result in lower margins or need to be passed onto the end consumer.