Orange Juice is Feeling the Squeeze; Can it Recover?

Orange juice has long been a staple of the American diet for decades, particularly at the breakfast table, but that appears to be changing. For the recently completed citrus growing season that ended in late September, retail sales in U.S. supermarkets dropped for the 11th time in the last 12 years. The 563.2 million gallons sold was also the lowest amount in 15 years.

Why are We Excluding O.J. from Our Daily Breakfast Routine?

The answer resides in a combination of factors. In addition to increased competition from a wider selection of juices (think pomegranate) and novelty beverages, the Florida orange groves are experiencing an unprecedented bacterial attack known as citrus greening disease.

Greening disease, for short, essentially cuts off the fruits’ nutrients and prompts them to drop prematurely from a tree. The reduction in production has led to historically higher prices as juice processers purchase 95 percent of the annual orange crop in Florida, encouraging average Joes at the grocery story to spring for cheaper alternatives.

Consumers are not the only ones losing the taste for concentrated orange juice. Speculative interest in citrus remains anemic. The 1983 movie Trading Places featuring Dan Aykroyd and Eddie Murphy that brought orange juice futures to the forefront of the national consciousness is but a fading memory. The WSJ pointed out in August that the average daily trading volume of 2,233 contracts represented a 15 percent decline in the past decade. Today those numbers continued to deteriorate.

An Orange Juice Revival

Despite these factors working against the fruit, orange juice has been making a comeback in the last few months in the commodities market and on the grocery shelf.

The WSJ reports that Americans bought 40.92 million gallons of orange juice during the four weeks that ended October 26, according to the Florida Department of Citrus. That amount is 5.9 percent higher than the four weeks that ended August 3.

On the futures market, the front-month O.J. contract in New York has recovered from a multi-month low of $1.16 per pound on October 28 to around $1.35 today. Coupled with rebounding demand, the industry is seeing worse-than-expected supply issues due to greening disease—a double boost for the bulls.

Crystallizing the impact of the disease, in the USDA crop report issued November 8, the agency projected Florida growers would produce fewer oranges this season compared to any time since 1990. Before the close that day the January contract quickly shot above $1.30.

How Much Higher Can Prices Go?

Taking a look at the daily chart, orange juice on November 12 bumped into strong resistance after touching $1.37 per pound (note the trend line in the chart below). If the January contract can break through this resistance level following the pullback, don’t be surprised by a run higher. From a fundamental perspective, keep a close eye on demand as the bulk of this year’s harvest is still a few months away. By the first quarter we should have a good idea on final production numbers for the 2013-2014 crop.

Orange Juice Daily Chart

OJ Front Month Daily Chart, Mid-May to Mid-November (Click to Enlarge)