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This is a transcript of episode ten of the Down to Agribusiness podcast. Visit the show page here.


Hurricane Irma vs the USA’s biggest orange juice supplier

Gareth Moore

Hello, and thanks for joining us for episode ten of the Down to Agribusiness podcast. I’m Gareth Moore. On September 10th of this year, Hurricane Irma first made landfall in the lower Florida Keys after causing widespread and catastrophic damage, particularly in parts of the North-Eastern Caribbean. When it reached Florida, it was a category four storm, with 130 miles per hour sustained winds.

In the days after the hurricane, due to the heavy rainfall, numerous rivers had flooded the surrounding land. Now, Florida is the USA’s biggest orange juice supplier and in fact, it used to be the world’s biggest, so naturally, we would expect the hurricane to have detrimental effects on crops. So, in this episode, I’m joined by Neil Murray here in London, who is the senior beverages analyst for IEG View to tell us how crops in Florida have been affected by the hurricane and what knock on effects we should expect. Hello, Neil, thanks for joining us, especially as I know you’ve just returned from the China Juice Conference in Shanghai.

Neil Murray
You’re welcome.

Gareth
Firstly, can you tell us about the damage to crops in Florida in the wake of Hurricane Irma? Where has the region seen the largest damage?

Neil
Well, the original forecast for the track of the hurricane was that it was going to work its way up on the East Coast of Florida but hurricanes are notoriously difficult to predict and the later forecasts predicted that it was actually going to go up the West Coast of Florida. In the event, it went straight up the middle, so it hedged its bets. It hit the citrus groves pretty much square on.

Gareth
What sort of effect are we going to see from the damage, both locally in the region, and in markets globally?

Neil 
It was unfortunate for Florida because after years of decline, they actually had a forecast for a harvest that was going to be slightly bigger than the previous years. The forecast was for around 70 million boxes. That sounds like a lot but to put it into context, it’s about a quarter of what Florida was producing twenty years ago. However, up is up. The damage forecasts for the crop were actually fairly difficult to assess because initially, people couldn’t get into the citrus groves and communications were damaged as well but it does look like Florida has lost about half its oranges. The Florida total may be as low as 35 million boxes. The problem is, a lot of the fruit was down from the trees, it was then floating in flooded water for ages and ages. Sometimes when fruit is down from a tree in a storm, you can collect it rapidly and send it off for juicing but this really wasn’t the case with Florida. Likely case is they’ve lost up to half their harvest and this is going to prove a real blow to the state, yes.

Gareth
When are we likely to see knock on effects from this?

Neil 
It’s hard to say because the sad truth is that Florida isn’t really a force anymore. It hasn’t been a force, really, for the last twenty years. It used to be the largest orange juice processing region in the world but Brazil came in, pre-empted it and took the number one spot and that left Florida as number two. Down to, shall we say, 35-40 million boxes of fruit this year, in the great scheme of things worldwide, it doesn’t make much difference because Brazil is expecting a much bigger orange harvest this year and bluntly, Brazil can pick up the slack.

Now what Florida produces particularly is not from concentrate, single strength orange juice. It does produce some FCOJ but its core product is NFC orange juice, sweet NFC orange juice. That’s what the Americans like, that’s what they drink, although consumption is falling. Brazil produces NFC as well but the production is increasing in other countries like Mexico, like Costa Rica, where they also make a sweet orange juice comparable to the Floridian product but at the same time, their product is also in demand for blending.

Fundamentally, the other countries can actually pick up the slack. You saw the effects of this in the futures market, because the futures market rocketed the moment it was certain that the storm, that Hurricane Irma, was going to hit Florida. Then after the hurricane had passed on, the futures market fell back and it did close up. It didn’t close anything like as high as it had actually previously been. The market has taken stock and actually thought, well, sadly for Florida, it really isn’t that big a deal.

The big problem is in the grapefruit because Florida, the peace river area, that’s where they product their grapefruit but the biggest producer has been, historically, Cuba. Cuba took a direct hit on its grapefruit groves and the problem with Cuba is when a hurricane this, it doesn’t just down the fruit because the sub soil is fairly shallow in Cuba. What it does is it just takes the trees out of the ground, so the damage is much more severe. There, you’re definitely going to see price increases on grapefruit juice but it’s a very minority product anyway, so globally, it’s not particularly significant.

Gareth
You mentioned Brazil earlier, what has their reaction been?

Neil 
Brazil stopped offering it, temporarily withdrew from the market when the hurricane hit, as they took stock and thought, okay, is this an advantage for us? What’s going to happen? How bad is the damage? Brazil has been steadily and slowly reducing its FCOJ prices over the last year because they knew they had a big crop coming along or they suspected they would. Last year’s crop was pretty poor but they also had to clear a large inventory. When they cleared the inventory, they put their prices up and they’ve now steadily been declining. The price of Brazilian orange juice on a CFR Rotterdam duty unpaid basis is about $2150-2200 a ton.

Florida is going to have an effect and I think what we will see is a fairly serious negotiation going on between major Brazilian processors, the big three, as they’re known and the independents and buyers at the Anuga trade show which takes place from the seventh of October. The effect on Brazilian NFC prices may be a little bit more marked. Brazil prices its NFC orange juice tactically. Chiefly because in Europe, they have to compete with other producers such as the Italians and the Greeks and especially the Spanish. They tend to keep their NFC juice price slightly artificially low whilst making up the shortfall on the price with their FCOJ prices. They may have to rethink their price balance.

Gareth
I just wanted to get your view Neil - if orange juice is looking to get more expensive, will apple juice be a stronger seller in the future?

Neil 
In theory, yes. Historically, if orange is expensive, then globally, there is a notable shift to apple juice and if apple juice is expensive, then globally, you get a shift back to orange juice. This year is a little bit of a problem. In the United States, the consumption of orange juice has been falling for the last six years very consistently and very severely. The last figures for the most recent four-week period show that actually, their retail sales were nearly 10% down. They’ve been averaging a decline of somewhere 6% or 7% for the last six years. US consumption is going down anyway. This is due to a number of things. There is the sugar scare, the supposition that fruit juice is not particularly good for you, the health scare, obesity, dental decay and all that. It’s not good for the juice industry but then exactly the same applies to apple juice.

Meanwhile, apple juice prices are going up. The Poles have had a not particularly good apple harvest and the control of the raw material is entirely in the hands of the apple brokers and the farmers, which means that the processors cannot get the raw material they want. At least not at the price they want. The result is that the AJC price is expensive. China is now coming back into the European market, but they are coming back with price rises. They’ve got an opportunity, they know they have an opportunity. They can raise their prices, they can come back into Europe and the can still undercut the Poles.

You’re seeing Chinese prices already at about $1150 a ton, which is nearly half the price of orange juice but that is an FOB price. It’s about 40% cheaper. On the other hand, they don’t want to raise their prices too much because apple juice, historically, competes with white grape juice to be used as a filler in juice drinks and juice blends. For example, if you’re looking at cranberry juice, you will actually find, whilst it’s a 100% fruit juice, something like 85% is actually apple or grape juice, depending on the price, and only about 15% is cranberry because you can’t drink pure cranberry juice, it takes the enamel off your teeth.

The Chinese have got to be fairly careful in their pricing. If they go too high and they could go higher than they are at the moment, then they might see a switch from European bottles and blenders back to white grape juice. It’s always a complex calculation here because you have to change all your labelling and all your packaging and that costs money. It’s not something that you would change on a whim and think, okay, we can change it back again in a few months’ time. If you’re doing a change, you have to have a fairly good, long term view. At the moment, there is nothing to suggest that the apple juice price is going to get any cheaper and significantly, the white grape juice price is already starting to strengthen.

It’s up by about €10 or €15 since, compared to what it was earlier this year. That’s per kilo. So, we may see a shift there. I don’t think we’re going to see a global shift to apple from orange because fundamentally, there are just too many other beverages for consumers to pour down their throats.

Gareth
Great, well, thank you very much for your time, Neil.

Neil 
You’re welcome.

Gareth
You can access additional content on the topics we’ve covered today, including more insights from the China juice conference on the podcast episode ten page. You can also read articles on the topics we’ve covered and much more at ieg-vu.com.

If you have any questions or comments regarding this podcast episode, or if you have a topic you’d like us to cover, you can reach out to us on Twitter using #DowntoAgribusiness. Be sure to subscribe to this podcast on iTunes or agribusinessintelligence.com where you’ll also find additional resources on this topic. Thanks for listening.

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