Citrus fruit

PRICES

- Benchmark and price discovery mechanism
- Risk management instruments
- Useful price links for citrus fruits
- Electronic commerce

Benchmark and price discovery mechanism

Prices for citrus fruits as well as for orange juice are determined by supply and demand conditions. As it is the case for many other agricultural commoditites, these prices tend to show a cyclical pattern. However, cycles tend to be longer than for other commodities, due to the perennial character of the crop. Supply factors include the amount of land for cultivation, yields and age of trees, weather conditions and the incidence of diseases. Demand depends on factors such as income levels, population growth, availability and relative prices of substitute fruits and the changing consumer preferences for fresh produce, including health, quality, convenience or taste characteristics. Promotion campaigns may play an important role in order to increase demand for citrus fruits and juices. Barriers to trade may also constitute a significant component of price in importing countries.

In addition, the increasing concentration and consolidation of retail chains in produce distribution and the corresponding increase in their buying power may influence producer prices, pressing them down, while asking for more stringent requirements for procurement, quality, traceability and allocation of space in the shelves. However, a USDA Economic Research Service report has shown that there is "little compelling evidence that consolidated markets engage in noncompetitive pricing. Instead, regional consolidation of food retailers and their integration into wholesaling appears to lead to lower market prices for orange juice. Increased private label competition with the leading national brands also contributes to lower orange juice prices. " (See: Binkley, J. et all, Consolidated Markets, Brand Competition, and Orange Juice Prices, Agriculture Information Bulletin No. 747-06 June 2002).

The evolution of produce consumption preferences, particularly in developed countries, shows an increasing importance of qualitative aspects of the product, in detriment of quantitative factors. This means that there is more focus on the value added of produce, and not only on the price variable.

Citrus fruits crops are highly vulnerable to weather conditions. Frosts, freezes, droughts, wind and hurricanes may affect them considerably, resulting in supply disruptions and increases in prices. Accordingly, the availability of citrus fruits may vary significantly between the different seasons. Prices of citrus fruits and of orange juice are therefore highly volatile, while they are relatively sensitive to changes in quantity supplied.

Price elasticity of citrus fruit supply is low because growers need long time to reach full productivity of the trees. In periods of oversupply, growers´ capacity to adjust their production levels from season to season is limited since costs associated with exit from citrus growing are quite significant, keeping downward pressure on prices. In addition, although advancements in storage and transport technologies allow for almost year round availability of citrus fruits in the Northern Hemisphere (off season demand tends to be fulfilled with Southern Hemisphere crops), these prices show a certain degree of seasonality over the year, related to the harvest seasons.

Prices can be set on the spot market at delivery or through cash forward contracts. In order to manage the existing price risk in the citrus fruits sector, it may be possible to hedge by using orange juice and citrus fruits futures and options. These instruments are mainly traded in the New York Board of Trade and the Mercado de Futuros y Opciones sobre Cítricos, Valencia, Spain. Futures prices in these markets provide useful benchmark prices for orange juice and citrus fruits. Alternatives to defer pricing may include pooling the fruit with other growers in a cooperative or with a private company or consigning the fruit to marketing representatives. Thanks to these alternatives, the negociating power of the groupings should be reinforced together with a greater flexibility to manage the prices on behalf of the producers.

The expansion of citrus fruits production during the last decades of the XX century, together with the slower growth of demand of certain citrus products, have resulted in lower prices for citrus products, particularly for citrus fruits growers. The following charts show some tendencies on the evolution of orange prices:

Comparison of grower orange prices in Brazil and USA (US$ per box)

Source: UNCTAD, from FAO data

Orange wholesale prices in real terms for major consuming markets
1982-2003 (US$ cents per kg.)

Source: UNCTAD, from FAO and IMF data

New York FCOJ Monthly Average Nearby Futures Settlement Price
(US cents per pound solids)

Source: Citrus Reference Book 2002, Florida Department of Citrus

FCOJ Price volatility shown in NYBOT

Source: NYBOT

Risk management instruments

New York Board of Trade

The New York Board of Trade (NYBT) exchanges currently offer futures and options contracts on frozen concentrated orange juice (FCOJ). These contracts are used by orange juice companies to set wholesale prices. They are traded under the auspices of the Citrus Associates of the New York Cotton Exchange, Inc., established in 1966. FCOJ futures have been traded since then, while options trading started in 1985. NYBOT began trading in the new FCOJ-2 and FCOJ-Differential futures contracts on Friday, October 1, 1999. The new FCOJ-2 contract, which calls for delivery of juice from Florida, Brazil or blends thereof, allows industry participants to directly hedge price risk associated with making or taking delivery of Florida/Brazil-only juice. The existing frozen concentrated orange juice contract (FCOJ-1) does not limit the deliverable juice to any specific country of origin. For more information, see NYBOT, FCOJ New Contract Information .

FCOJ contracts are normally sold in rail car units, with a standard capacity of 15,000 pounds. Most orange juice is sold as concentrate, where all water is removed, in units of "pounds solid", which are approximately 1.17 pounds per unit.

Mercado de Futuros y Opciones sobre Cítricos

The project for the development of a commodities futures market in Spain first appeared as a joint initiative on behalf of the Valencia Stock Exchange, the Generalitat Valenciana (regional autonomous government) and the Chamber of Commerce and Industry of Valencia in the late eighties. In April 1990, the Foundation of Stock Exchange and Financial Studies (FEBF) was founded with the aim of studying the feasibility of the commodities market, paying special attention to oranges as a possible underlying asset. In June 1991 an agreement of consultation and co-operation was signed between the Valencia Stock Exchange and the Foundation with MATIF (Marché a Terme Internationale de France). This collaboration was concluded upon completion of the study for setting the market up. It was then that a contract was signed with MEFF Renta Fija (Spanish Financial Futures Exchange) for their technical support in the new market. Trading on the Navel-navelina oranges futures contract first began on the 8th of September 1995, and on 2nd of January 1996, it also began on Valencia Oranges futures contracts. Since the 1st of October 1998, FC&M trades with its own electronic trading system, the nen21.

The reasons for the choice of oranges as the underlying asset for the futures contract were based in the importance of citrus fruits in the Valencian and Spanish economy. Spain plays a very relevant role as citrus fruit producer world wide and it is the top exporter of fresh citrus fruit. 75% of national production is concentrated in Valencia.

For detailed information on the exchanges, prices and contract specifications, you may visit the corresponding websites for the above mentioned exchanges. For additional information on risk management for citrus fruits and orange juice, see also:
- Reports on the 8th Annual International Economic Outlook Conference for Citrus and Non-citrus juices, Panel discussion on the FCOJ Futures/Options Market, - October 2002,
- Florida Citrus Mutual, FCOJ Futures,
- Cuenca, A. (1998), El Mercado de Futuros y Opciones sobre Cítricos, Revista de Treball, Economia i Societat, nº 8,
- Fernandez, M. A. and Muñoz, M.J. (1998), Análisis del mercado de Futuros en Cítricos FC&M desde el punto de vista del potencial operador, Revista de Treball, Economia i Societat, nº 10.

Marketing

New technologies and Internet-based structures may have positive implications for electronic trade in these products and for logistics, management and procurement systems. They provide better access to worldwide information and communication, as well as new marketing and promotion tools. This technological advances may enhance trade opportunities for countries involved in the citrus fruits market. Although many doubts still exist about the future of these new technologies in fresh produce marketing , they are providing new ways of doing business. According to Euromonitor, the potential to do business via the Internet depends on a suitably high proportion of the target audience having access to on-line facilities . There are several examples of leading grocery chains allowing customers to place orders over the Internet for home delivery. This reflects the need to continue increasing market share, and to offer consumers increasingly flexible ways of shopping. Some interesting examples of electronic platforms for citrus fruit are:
- FloridaOrange.com,
- Fruit Auction,
- Farmworld,
- Food Trader,
- Agro Market Place,
- Fruit Business,
- Fruit2juice,
- Juice World,
- Fruit Line,
- Food Market Exchange.