Orangonomics

ANALYSIS of swings in commodity prices usually involves sage pronouncements on the Chinese economy, geopolitics or the rise of resource nationalism in developing countries. But recent gyrations in orange-juice prices have far more to do with more prosaic factors such as the weather in southern Florida or the ravages of blossom blight and black-spot disease on Brazil’s crop. The price of frozen-concentrated-orange-juice futures has leapt by around 25% since the start of the year to a 34-year high, mainly on concerns that Brazil, an important source of American imports, may have used banned fungicides which could result in an import ban.

Frozen orange-juice concentrate was developed by the Florida Citrus Commission and the United States Department of Agriculture as part of America’s effort to bring the savour of fresh fruit to struggling allies in the second world war (for an interesting study of America's orange juice market see here). Trading in futures took off post-war as the hard work that was to guarantee decades of American economic domination left little time for squeezing fresh juice at home. Juice companies and farmers were also keen to hedge against the ravages of frost, hurricanes and tree diseases.

More recently, Americans lost some of their thirst for orange juice: sales fell by nearly 9% in December compared with a year ago. And juice made from frozen concentrate has been losing ground to tastier fresh juices in recent year. But trees in Florida are disappearing faster, not least because many orange groves were turned into housing developments during the property boom. As a result, citrus output (which includes grapefruit) dropped by nearly 40% between 1996 and 2010. All that has resulted in an already thin market becoming thinner still: estimates put the value of daily trades at a measly $35m. And Brazil, which produces half the world’s orange juice, has become even more important.

Thus, potential for problems with Brazilian imports, coupled with a recent cold snap in Florida that might have done some damage to the orange crop (pictured), has added extra volatility to a market whose small trading volumes are already reason enough for barely explicable rapid price movements. That said, another explanation cannot be discounted. Short sellers, expecting falling prices, may be panic-buying to cover positions as contracts expire to prevent a catastrophic “squeeze” in the orange juice market.