Hackett Advisors in the News

Orange Juice Prices Sweeten on Supply Worries

Justin Rohrlich September 22, 2010 1:15 PM|

       The price of orange juice has been surging higher, now up eight straight sessions.

The price of orange juice has rocketed higher recently as fears mount about the potential for hurricane-caused damage to citrus crops, but commodity pros warn that, should those worries not bear fruit, the price of OJ will tumble as demand for the juice remains anemic.

The price of orange juice has been surging higher, now up eight straight sessions. The price jumped 3.3% yesterday. It’s up 17% this month and more than 60% over the past 12 months, according to Bloomberg data.

Orange juice is a reported $20 billion industry with prices affecting farmers, consumers, and companies like PepsiCo (PEP), maker of Tropicana.

Prices have jumped as concerns climb about the threat posed by hurricanes to Florida’s citrus crop, says Shawn Hackett of Hackett Financial Advisors, a Florida-based money manager specializing in agricultural commodities.

“The weather models all say that we'll have a hurricane develop over the weekend and it could go right into central Florida and trash the current crop,” Hackett says.

He adds, “We had hurricanes hit in 2004 and 2005 and it just devastated orange juice production. But it is very rare for a hurricane to actually do that. Most of the time, the storms don’t have a direct hit or they’re not as strong as expected.”

However, if a hurricane did slam Florida’s citrus groves, it could have a significant impact on orange juice supply.

Florida produces more oranges than any other region of the world, except Brazil, according to trade organization Florida Citrus Mutual. There are more than 11,000 citrus growers cultivating almost 82 million citrus trees on more than 620,000 acres of land in the state.

During the 2007-08 season, Florida harvested 203.8 million boxes of citrus, representing about 70% of total US citrus production.

But, absent hurricanes wreaking havoc on supply, commodity experts say that a spike down in prices seems likely as fundamentals remain extremely bearish. Consumers, wary of high juice prices, haven’t been drinking OJ.

In fact, orange juice sales are on pace to be the lowest since the late 1990s, according to Florida Citrus Mutual.

“Consumers are now drinking alternative beverages,” says Kevin Kerr of Kerr Trading International. “Juice is one of the most expensive commodities people buy when they’re shopping at the grocery store. So they will opt for things that are cheaper, like powdered beverages. If consumers see orange juice selling for $5 then they’ll go for the Hi-C.”

What’s needed in the orange juice market, says Hackett, is for retailers to lower prices to stimulate demand. But it will likely take a futures price plunge to cause such a needed adjustment, he says.

As for trading ideas, Hackett argues that it’s too early to short this market given that hurricane threats can persist well into October, so for now, in his opinion, this market is to be avoided.

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