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MERRILL LYNCH & CO.
North Tower, 21st Floor, New York, New York
(September 18, 1997) FROZEN CONCENTRATED ORANGE JUICE: The juice market continues to be weighed down by not only the large carryover anticipated for the 1996-97 season, but also on prospects of even higher output next year. The first USDA Florida orange crop estimate will be released the morning of October 10.
Florida sources indicate the trees are laden with fruit, although because of the heavy fruit set, the oranges are slightly smaller. Moreover, it is possible that droppage could be heavier than normal, but certainly not sufficiently so to impact the market outlook. Growers have been reluctant to sell fruit at lower levels, but the day of reckoning might be upon them and if the USDA estimate is even higher than expected, prices are apt to drop sharply.
The market is still divided between speculators who control the lion's share of the long position and the trade, which is predominantly short and not likely to lift these hedges given the bearish fundamental outlook. For now this standoff has kept the market drifting sideways with a slight downward bias, but if the estimate is truly bearish, the longs might finally throw in the towel. Stops are believed to be resting under 65 cents.
While there is talk of increased promotions, particularly of private label brands, it would be extremely difficult for retail sales to rise sufficiently to offset the anticipated glut in supplies. As stated previously, retail prices have been very slow to drop, because there is little incentive for retailers to move more orange juice and detract from sales of higher profit margin blended juices and because of limited shelf space.
Reports of increased incidence of disease in Brazilian orange groves went unnoticed by the market. According to one report Citrus Variegated Chlorosis (CVC) is now in 34% of all of Sao Paulo's orange groves up from 23% last year. There is apparently no cure for this bacteria which is spread by crickets and could kill trees.
(Reprinted by permission. Copyright © 1997 Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
Judith Ganes
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