Oil, gold, platinum – orange juice?

It is fair to say that for The Virgin Investor, the first thought upon hearing the words ‘orange juice’ is ‘ice or no ice’ as opposed to ‘buy or sell’.

But like any of the other more famous commodities, orange juice is tradeable on stock exchanges, in its frozen concentrated form.

Prior to 1947, only the freshly squeezed variety of orange juice was consumed. The main problem with freshly squeezed orange juice is that it is quite perishable, only lasting a matter of days in chilled conditions. Because it is so perishable, costs of storage are high, homogeneity of quality is low (as freshly squeezed orange juice that is a few days old is less valuable than a newer batch) and the ability to trade internationally is limited by shipping times. All these factors reduced the suitability of freshly squeezed orange juice to be a tradeable commodity.

After 1947, the introduction of frozen concentrated orange juice brought with it a product that could be traded as a commodity. This is possible as in this form, orange juice is homogenous across suppliers and is significantly less perishable than the traditional freshly squeezed variety. Currently about 80% of the world’s frozen concentrated orange juice is produced in Brazil, with a large part of the balance being produced in Florida.

Throughout 2016, the market price of frozen concentrated orange juice has shot up, rising to an all-time high of around $2.33 per pound. So what drives the market price of this commodity to rise or fall?

 

Supply issues (crop disease, adverse weather)

Given that 80% of the world’s orange juice supply is from Brazil, the market is highly sensitive to local supply issues – two of the main issues that may affect a harvest being weather and disease.

The 2016 spike in the market price of frozen concentrated orange juice is largely caused by Citrus Greening, a severe plant disease that originated in Asia. As a result it is expected orange supply and production this year will be at a record low.

 

Currency fluctuations

The strength of the Brazilian Real also has a part to play given that the cost of production (for example water, labour) of oranges in Brazil are largely priced in the Real. If the Brazilian currency strengthens, the revenue from sales made abroad will reduce. Therefore when the Brazilian Real is strong, farmers may be discouraged from sending produce abroad, restricting global supply and causing market price increases.

 

Demand issues (consumer trends)

In recent years, demand for concentrated orange juice in the west has fallen as increasingly health and food conscious populations switch to freshly squeezed orange juice. Outside of the west, growing middle classes in developing countries looking for ways to improve their diet may continue to support the price of frozen concentrated orange juice.

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