Orange juice futures are in a tight spot.
Our increasingly health-conscious culture has cast an unfavorable light on the classic juice. Thus, the vitamin C staple of our youth hit a fresh 12-month low last week.
On top of slumping demand, excess supply and high prices are deterring loyal consumers.
Things are not looking good for orange juice; it may take a superhero to save this fruit.
Or maybe just a Marvel makeover…
Perception Crushes Demand
Unexpectedly low demand for the juice in the United States has put the squeeze on prices.
According to the U.S. Department of Agriculture (USDA), per capita consumption of OJ is down 45% from its 1998 peak, and is at its lowest since 1986. In 2012, consumption was just 3.2 gallons per person (gpp), compared to 5.8 gpp 16 years ago.
Recent studies show people perceive OJ to have too much sugar, despite its high vitamin content.
Unfortunately, the perception isn’t far off in reality. An eight-ounce container of Tropicana Pure Premium has 22 grams of sugar, just four grams short of a regular Coca-Cola.
Furthermore, OJ has become far more expensive compared to other drinks. OJ prices in August averaged $6.46 per gallon, up 4.5% from a year ago.
Thus, consumers are migrating to other lower-calorie and more fashionable drinks, such as acai juice, coconut water, tea blends, and sports drinks.
But the orange juice industry refuses to take this news lying down.
Recently, the Florida Department of Citrus (with help from Marvel Entertainment) revamped its mascot, Captain Citrus. The former orange with a green cape has been replaced with a hunky Marvel character in a golden, sun-powered suit.
No doubt, the iconic Captain will boost the image of the citrus industry, but will it be able to save the commodity?
Looking Through Orange-Colored Glasses
Futures erased gains for the year largely due to the USDA’s crop report, which unexpectedly showed the low demand for orange juice and a rising crop output, due to ideal growing conditions in Florida.
Florida – the world’s second-largest producer behind Brazil – has seen close to a perfect mix of sun and rain.
The report stated that during the season, which began October 1, output will rise 3.3% from the previous year to 108 million boxes.
Last season’s output was the lowest since 1985 after citrus-greening (a bacterial disease) damaged crops.
Nevertheless, this is well below the previous years’ output, as you can see in the chart below.
Technically, orange juice futures are trading below their 20- and 100-day moving average after a period of choppy price movements.
Nevertheless, there looks to be more room on the downside, offering opportunities to short the market, at least through the end of autumn.
Orange Juice Futures
The best orange juice pure-play is via the futures market or Frozen Concentrated Orange Juice (FCOJ).
But trading FCOJ is very different from gold or crude oil. FCOJ volume is typically thin and open interest is low, particularly in the off-season, making futures unpredictable and erratic.
Investors should note that FCOJ futures are considered a true weather market. It takes just one hurricane season to destroy orange trees that can take up to 15 years to mature.
Timing is also crucial. Orange juice futures are especially challenging in January, which is the peak of Florida’s winter.
In Brazil, droughts can be devastating to the crops, particularly during the dry season from July to November. Investors should pay close attention to crop and weather reports during these times.
FCOJ futures are also seasonal, rising during winter and suffering during March, Florida’s frost season. Prices tend to rise in May and June.
Diseases and pests are two other serious threats. Citrus-greening disease has affected the orange crop in Texas, another leading U.S. producing region, curbing supply and resulting in price spikes. Other threats to yield include citrus canker, citrus variegated chlorosis, and Asian citrus psyllids.
You can also gain exposure through equities.
Despite a suffering industry, OJ is not disappearing. In fact, it’s a $3.5-billion business in the United States. So, why not consider a nice mimosa during brunch this weekend?