Bad year puts the squeeze on orange crops

/ Source: The Associated Press

Orange juice prices, already at historic highs, are expected to climb further as production in Florida’s hurricane-ravaged groves bottoms out.

But it’s not just consumers who will be affected: Juice makers like PepsiCo Inc.’s Tropicana Products and The Coca-Cola Co.’s Minute Maid, which get the vast majority of their juice from Florida, are facing a profit squeeze from rising domestic prices and imports from Brazil that come with margin-killing tariffs.

The U.S. Department of Agriculture this week predicted Florida would produce 135 million 90-pound boxes of oranges, down about 40 percent from production levels before the 2004 hurricane season. It would be the third year in a row of subpar production, and the worst orange harvest since freezes crippled crops in 1990.

“I can tell you that we’ll monitor this, and decide what course we need to take as we analyze the information,” Minute Maid spokesman Ray Crockett said, declining to answer specific questions about possible price hikes.

Both Minute Maid and Tropicana had just announced price increases to retailers even before the USDA announcement. Tropicana instituted a 10 percent bump, citing “continued pressures on supply and cost” that are strengthening. The company said it expected prices to continue to rise as the Florida harvest falls.

Coca-Cola last month announced a 3 percent to 6 percent hike in wholesale list prices for Simply Orange and Minute Maid orange juice, effective this month.

However, it remains to be seen what consumers are willing to pay. A 9 percent jump in average retail prices this year to $4.89 per gallon has met with a 6 percent drop in volume, according to an ACNielsen report for the four weeks ended Sept. 2.

Following an earnings report Thursday, PepsiCo Chief Executive Indra Nooyi said the cost of orange juice for the Tropicana line was the biggest pressure on profit.

“Tropicana is analyzing how this significantly low crop yield estimate will impact the juice category and particularly Tropicana,” spokesman Pete Brace said in a written statement. “However, this small crop yield estimate will provide little relief to consumer prices.”

To make up the shortfall, wholesalers will likely have to rely more on imports of Brazilian juice, which carry a nearly 30-cent per gallon tariff. The state of Florida is second only to the country of Brazil in world orange production.

Brace declined to specify how much more juice Tropicana might have to import.

Bob Norberg, deputy executive director of research and operations at the Florida Department of Citrus, said state economists were still working on a model projecting how much imports might rise. However, he said significant demand in the rest of the world will limit how much juice is directed to the U.S. market.

“(Imports) will be up, but they won’t make up the entire shortfall,” Norberg said. “Prices will go up to allocate the available supply.”

The good news for growers is that high prices for their scarce fruit could provide some of their best returns in over a decade. Production inputs like fuel, labor and new chemical sprays to fight fruit-damaging diseases had been squeezing their margins, and overall citrus acreage has continued to decline as some sell off their land to hungry developers with hefty checks.

Mike Sparks, executive vice president and CEO of Florida Citrus Mutual, the state’s largest grower’s group, said the projected import hikes shouldn’t concern growers.

“If the crop ever got so low that you had to take it off the shelves in the grocery store, it would be tough to get that space back,” he said.