Squeezed Oranges: Orange Juice Futures Rising on Fungicide Fears

The Wall Street Journal's Leslie Josephs and Liam Pleven recently reported that "[t]he market for orange juice futures received another jolt" following the federal government's saying that Brazilian orange juice imports "contained a potentially harmful fungicide" known as carbendazim. Wall Street Journal: "The news on Tuesday sent prices of the January contract soaring 9.7% to a record settlement as traders fretted that the appearance of the fungicide could lead to a sharp reduction in Brazilian orange juice imports."

According to CBS News, "FDA officials said they aren't concerned about the safety of the juice but will increase testing to make sure the contamination isn't a problem." Fungicides are used to control the growth of mold, fungi, and fungal spores on agricultural products. The fungicide carbendazim, though not approved for use on citrus fruits in the US, is used in Brazil. Per the Wall Street Journal article, researchers have said that high levels of carbendazim can cause cancer.

According to the USDA, Brazil "exports orange juice to the US and is the biggest producer of oranges in the world." With respect to orange juice currently on grocery store shelves, FDA agency official Nega Beru said that "[b]ecause the FDA doesn't believe the levels of residue are harmful...the products will not be pulled."

Aside from fears of fungicide, orange juice prices have also been hit by weather factors in Florida. Wall Street Journal: "Traders already had driven prices higher this year amid worries that a recent cold snap in Florida had damaged crops." According to the Wall Street Journal, analysts believe that "[i]f [orange juice] prices remain at these elevated levels, it soon could be reflected in prices on supermarket shelves...potentially crimping already flagging demand for the beverage."

Even more, increasing orange juice prices in conjunction with a plunge in consumer demand could end up hurting producers. Wall Street Journal: "Coca-Cola KO [the maker of Minute Maid] and [Tropicana producer] Pepsi PEP together controlled almost two-thirds of the US market in the past year." Even so, "[s]hares of both companies were little changed on Tuesday." During Wednesday's trading, Cola-Cola dropped 2.31 percent to a price of 67.73 and PepsiCo, Inc. dropped 1.81 percent to 64.47.

Though the orange juice market is relatively tiny, issues with the market could have heavy implications for US consumers. According to Bernstein Research analyst Steve Powers, "If these trends hold and persist, we could see these companies needing to raise prices again." Even so, the Financial Times noted that although orange juice is at a 34-year high owing to the fungicide fears, consumers are turning to other drinks. Financial Times: "US consumption of orange juice has fallen by nearly a quarter in the past decade, according to the US Department of Agriculture."

While Coca-Cola and PepsiCo appear to be relatively unaffected by orange-juice fungicide fears, the UBS E-TRACS CMCI Food Total Return ETN FUD, which "holds a basket of agriculture futures contracts, including OJ", has risen nearly 5 percent in the past month. Further, the PowerShares Dynamic Food & Beverage ETF PBJ appears relatively unchanged.

Though retail orange juice prices may rise putting an additional squeeze on US consumers (akin to what occurred with peanut butter prices), like peanut butter, orange juice is a pragmatically elastic consumer item, i.e. customers can find orange juice substitutes. Nevertheless, for such American staples as orange juice and peanut butter to be put to the test (while fuel costs and food prices rise in general) may be unwelcome for the US consumer. For those US consumers that love orange juice that may have to face higher retail prices for the beloved beverage at the grocery store, there is no "fun" in fungicide.

Yes, between the weather and fungicide fears with subsiding demand, orange juice prices may find a stable equilibrium in retail prices, but who doesn't like an ice-cold glass of orange juice in the morning? If orange juice prices rise and consumption declines, what's next, no eggs and bacon for breakfast?

ACTION ITEMS:

Bullish:
Traders who believe that orange juice prices will rise owing to cold weather in Florida and Brazilian fungicide fears might want to consider the following trades:

• Check out the ICE Commodities Futures exchange for frozen concentrate orange juice (FCOJ-A) prices.

• Traders who believe orange prices will rise may also want to check out the PowerShares Dynamic Food & Beverage Portfolio PBJ and the UBS E-TRAC CMCI Food Total Return ETN FUD.

Bearish:
Traders who believe that rising orange prices will lead to declining consumer demand for product that will significantly affect companies' share prices may consider alternate positions:

• Check out possible short positions with PepsiCo PEP and Coca-Cola KO.

• Traders could also check out possible short positions with Dole Food Company, Inc. DOLE and Fresh Del Monte Produce Inc. FDP.

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