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MERRILL LYNCH & CO.
World Financial Center, New York, New York
(October 16, 1997) FROZEN CONCENTRATED ORANGE JUICE: CITRUS SURPLUS IS HUGE–Historically a period of extremely low FCOJ prices has been followed by a dramatic rebound. Unburdening the market from oversupply has always been one of two factors–either a freeze or a sudden increase in demand caused by the low prices. Speculators, fully aware of this fact, have been buying the market for months in anticipation of this occurring. The extent of the surplus this year is expected to be so great, that one has to question whether either of these events would be able to accomplish this onerous task, swinging the supply situation from one of plentitude to that of a shortfall.
There has been little evidence of retail demand responding to the low prices. In fact, the reason could be that retail prices have simply not fallen. The retail price of all forms of orange juice season-to-date is $3.81 compared to $3.68 last year at the same time according to Nielsen data published by the Florida Department of Citrus. Advertising has increased somewhat and this has helped lift sales to 623.7 million single strength equivalent gallons compared to 609.76 million SSE gallons in 1995-96, but again this is well short of increases necessary to clear out inventories. The situation will be compounded in 1997-98 with even higher production anticipated in both Florida and Brazil.
Given the large 1996-97 projected carryover and the enormity of the Florida 1997-98 orange crop, a light to moderate freeze this winter might not turn the fundamentals around. Sure, prices are likely to respond initially, but in all likelihood there will still be ample Florida supply, and if not, Brazil would easily be able to meet the reduction. With fruit prices trading as low as 55 cents, long-term production trends could be slowed, but it will take several years before this becomes evident. Young trees planted earlier in the decade will continue to mature producing more and more fruit.
(Reprinted by permission. Copyright © 1997 Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
Judith Ganes
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