How To Play The Orange Juice Market

Includes: COT, DOLE, KO, MCD, PEP, WEN
by: Michael LoGalbo

With the recent turmoil in orange juice imports, it will be interesting to see how this market unfolds in the coming months. A few conflicting factors come in to play when analyzing the future of this commodity. I believe that orange juice futures will experience a volatile market over the next 12 months, peaking in the short term, falling through the medium term, and potentially finding support to rise in the long term.

In the short term, the market may see increased prices as the FDA conducts an investigation of Brazilian orange imports. The FDA has found traces of Carbendazim fungicide in the Brazilian oranges, which is known to cause cancer. When the news was released on Tuesday, futures prices jumped 9.7% but have since pulled back as investors locked in profits. Currently, the market is speculating on this investigation and has priced in a potential price hike. If the FDA finds significant amounts of Carbendazim, a massive call back may be put into action, drastically limiting orange supply. On the other hand, if the media picks up the news and disseminates in such a way as to cause another “2003 mad cow” like scare in the public, expect prices to plummet to new lows. After the deadly disease was found in Canadian-born beef, stock prices of companies like McDonald’s (NYSE:MCD) and Wendy’s (NYSE:WEN) fell over 6%. It took 6 months for prices to return to previous highs and over 2 years for the USDA to allow Canadian cattle and beef products back into the U.S. However, because the FDA is only investigating it seems this outcome is less probable and short term prices will move in response to speculation on the FDA investigation.

In the medium term, expect orange juice futures to lose footing at current levels and drop with decreased consumer demand. According to the U.S. Department of Agriculture, orange consumption has decreased an average of 4% per year over the last 10 years, yet orange juice and other orange-based products maintain consistent price levels. If demand remains low and prices continue to rise, orange juice producers like Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), who own Minute Maid and Tropicana respectively, could raise prices. A price hike on the consumer would further dampen demand as consumers can easily turn to other drinks. Short positions in these orange juice producers or others like Dole Food Company (NYSE:DOLE) and Cott Corporation (NYSE:COT) may pay off through 2012.

The longer-term view on the orange market is dependent on a list of macro-economic factors. Mainly, economic growth and population growth will increase consumption of orange juice and other fruit products, driving prices upward. In addition, popular trends to diversify diets and eat healthier will continue leading consumers to healthier options such as fruits and vegetables. The largest risk for this commodity lies in the labor market. A struggling economy and labor market affects both the supply, in production growth capacity, and demand, in consumption, of orange juice. Many macro-economic factors will affect the orange juice market and the rest of the agriculture market in the coming years so it is important to remain observant and watch for how this sector will react.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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