Endemic HLB and and A Potential A Potential Endemic HLB Economic - - PowerPoint PPT Presentation

The Sustainability of The Florida The Sustainability of The Florida and Brazil Citrus Industries Under and Brazil Citrus Industries Under Endemic HLB Endemic HLB and

and A Potential

A Potential Economic Solution Economic Solution

By Allen Morris, UF/IFAS/CREC By Allen Morris, UF/IFAS/CREC GCONCI Citrus Dinner, May 4, 2010, Limeira, GCONCI Citrus Dinner, May 4, 2010, Limeira, Brazil Brazil

Purpose of Report Purpose of Report

• This presentation does not represent

This presentation does not represent views or predictions of IFAS. views or predictions of IFAS.

• It is a scenario of the most likely ways the

It is a scenario of the most likely ways the Florida citrus industry would respond to Florida citrus industry would respond to HLB HLB-

• induced declining fruit volumes and

induced declining fruit volumes and the potential outcomes the potential outcomes

• A cure for HLB could be near, and these

A cure for HLB could be near, and these scenarios would not occur scenarios would not occur

The Supply Side The Supply Side

• Most Florida bulk processors owned groves prior to the

Most Florida bulk processors owned groves prior to the 1990 1990’ ’s s

• -For 25

For 25-

• 50% of Needs

50% of Needs

• -Helped mitigate price risk

Helped mitigate price risk

• -When fruit supplies were scarce and processing margins

When fruit supplies were scarce and processing margins were squeezed, grove profits supported the business were squeezed, grove profits supported the business

• -When fruit supplies were abundant and fruit prices were

When fruit supplies were abundant and fruit prices were low, increased processing margins supported the low, increased processing margins supported the business business

The Supply Side The Supply Side

• Beginning in the 1990

Beginning in the 1990’ ’s, bulk processors s, bulk processors typically did not own groves typically did not own groves

• -Industry consolidation led to new entrants

Industry consolidation led to new entrants wanting to avoid the capital of grove wanting to avoid the capital of grove

• wnership
• wnership
• -Result was that most of them did not

Result was that most of them did not survive survive

The Supply Side The Supply Side

• The other ways bulk processors can

The other ways bulk processors can mitigate price risk is with toll processing mitigate price risk is with toll processing agreements and/or pricing mechanisms agreements and/or pricing mechanisms with customers with customers

• -Toll processing contractually guarantees

Toll processing contractually guarantees covering toll processing margin covering toll processing margin

• -A pricing mechanism can be designed to

A pricing mechanism can be designed to buy fruit and/or hedge with FCOJ futures buy fruit and/or hedge with FCOJ futures and options and options

The Supply Side The Supply Side

• Current reduced crops and high fruit prices

Current reduced crops and high fruit prices squeezing bulk processing margin squeezing bulk processing margin

• -Fruit prices nearly as high as bulk juice

Fruit prices nearly as high as bulk juice prices prices

• -Brands (except one) no longer need toll

Brands (except one) no longer need toll processing because of excess capacity processing because of excess capacity

• -Increasingly fewer bulk processors have

Increasingly fewer bulk processors have pricing mechanisms that cover fruit price pricing mechanisms that cover fruit price risk risk

The Supply Side The Supply Side

• In the expected future environment of

In the expected future environment of reduced fruit supplies, bulk processors will reduced fruit supplies, bulk processors will go out of business go out of business

• -Processing margins zero or negative

Processing margins zero or negative

• -No toll processing

No toll processing

• -Brands will best be able to compete for

Brands will best be able to compete for fruit fruit

• -Two bulk processors that process for

Two bulk processors that process for brand without plants will be in business brand without plants will be in business

The Supply Side The Supply Side

• Impact of HLB on fruit production

Impact of HLB on fruit production

• -Without a cure, Florida could be down to

Without a cure, Florida could be down to 100 MM boxes of oranges and 12 MM 100 MM boxes of oranges and 12 MM boxes of grapefruit in 5 years boxes of grapefruit in 5 years

• -Brazil will not be impacted as severely

Brazil will not be impacted as severely because they are able to move production because they are able to move production south and north away from HLB south and north away from HLB

• -Brazil will likely be down to about 300MM

Brazil will likely be down to about 300MM boxes in 5 years boxes in 5 years

The Supply Side The Supply Side

• Brazil

Brazil’ ’s greater fruit production will enable s greater fruit production will enable it to increasingly supply Florida brands and it to increasingly supply Florida brands and private label private label

• -More pressure on Florida

More pressure on Florida-

• owned bulk
• wned bulk

processors processors

• - Brazil will find it more economical to

Brazil will find it more economical to supply U.S. customers from Brazil rather supply U.S. customers from Brazil rather than from both Florida and Brazil than from both Florida and Brazil

The Supply Side The Supply Side

• Florida processors that initially survive

Florida processors that initially survive

• -Brands

Brands

• -Those with branded partners

Those with branded partners

The Supply Side The Supply Side

• The tipping point

The tipping point

• -As orange volumes go below 100MM

As orange volumes go below 100MM boxes, Florida and Brazilian bulk boxes, Florida and Brazilian bulk processors leave Florida processors leave Florida

• -Brands no longer process when orange

Brands no longer process when orange volumes move into the 60 volumes move into the 60-

• 75MM box

75MM box range range

• -They will likely still store and package

They will likely still store and package imported juice in Florida imported juice in Florida

The Supply Side The Supply Side

• A second bulk processing phase may emerge

A second bulk processing phase may emerge

• -Large growers, newly

Large growers, newly-

• formed grower

formed grower cooperatives and/or private investors may buy cooperatives and/or private investors may buy bulk plants for $.10 on the dollar bulk plants for $.10 on the dollar

• -fruit prices would be favorable because there

fruit prices would be favorable because there would be no other market alternatives would be no other market alternatives

• -Last bulk processor would stay until fruit volumes

Last bulk processor would stay until fruit volumes drop below economies of scale, about 12 drop below economies of scale, about 12-

• 15MM

15MM boxes boxes

The Market Side The Market Side

• Funds to support generic marketing would be

Funds to support generic marketing would be further reduced because of lower fruit volumes further reduced because of lower fruit volumes

• -Result is increased competition between OJ and

Result is increased competition between OJ and

• ther juices, juice blends and beverages
• ther juices, juice blends and beverages
• -Brands may introduce new juice beverages and

Brands may introduce new juice beverages and blends with health claims rivaling OJ, but lower blends with health claims rivaling OJ, but lower-

• priced

priced

• -Reduced OJ demand puts downward pressure

Reduced OJ demand puts downward pressure

• n bulk juice and fruit prices
• n bulk juice and fruit prices
• -Will likely occur in cycles

Will likely occur in cycles

The Market Side The Market Side

• Market impacts on the surviving Brazilian

Market impacts on the surviving Brazilian citrus industry citrus industry

• -Brazil will not have a competition

Brazil will not have a competition-

• free

free monopoly and be able to raise prices monopoly and be able to raise prices

• -Increased OJ price elasticity in the U.S.

Increased OJ price elasticity in the U.S. and existing high OJ price elasticity in and existing high OJ price elasticity in Europe and resulting downward OJ price Europe and resulting downward OJ price pressure will reduce Brazil pressure will reduce Brazil’ ’s profitability s profitability and fruit beverage market share and fruit beverage market share

The Market Side The Market Side

• Brazilian growers and processors may

Brazilian growers and processors may even decide to move to sugar, coffee and even decide to move to sugar, coffee and rubber in preference to oranges and OJ rubber in preference to oranges and OJ

Two Potential Economic Solutions Two Potential Economic Solutions

• Scenario One

Scenario One – – Federal support required Federal support required and only mediocre profitability and only mediocre profitability

• -Federal government funds replanting

Federal government funds replanting groves lost to greening groves lost to greening

• -This is less expensive than the canker

This is less expensive than the canker eradication program eradication program

• -Costs less to cover replanting costs and

Costs less to cover replanting costs and the first year the first year’ ’s tree care than pay for the s tree care than pay for the economic life of trees economic life of trees

Scenario One Scenario One

• To qualify for funds, growers must comply with

To qualify for funds, growers must comply with an aggressive greening management program an aggressive greening management program

• -Spray for psyllids and remove trees at low

Spray for psyllids and remove trees at low infection rates infection rates

• -Substitute enhanced foliar nutritional program at

Substitute enhanced foliar nutritional program at higher infection rates higher infection rates

• -Replant to high density

Replant to high density – – 200 or more trees per 200 or more trees per acre acre

Scenario One Scenario One

• Results

Results

• -Less profitable Florida citrus industry,

Less profitable Florida citrus industry, dependent on government supports to dependent on government supports to survive survive

Scenario Two Scenario Two

• Same replanting and HLB management

Same replanting and HLB management programs as Scenario One programs as Scenario One

• - Create a world marketing fund to grow OJ

Create a world marketing fund to grow OJ demand in Europe and restore growth in OJ demand in Europe and restore growth in OJ demand in the U.S. demand in the U.S.

• -Tax Brazilian growers at same rate as Florida

Tax Brazilian growers at same rate as Florida growers growers

• -Use funds to begin generic marketing program in

Use funds to begin generic marketing program in Europe and increase/restore generic marketing Europe and increase/restore generic marketing in the U.S. in the U.S.

Scenario Two Scenario Two

• Fund would be divided according to the U.S. and

Fund would be divided according to the U.S. and European shares of the combined markets European shares of the combined markets

• -Currently 53% for Europe and 47% for the U.S.

Currently 53% for Europe and 47% for the U.S.

• -Brazilian processors would support this division

Brazilian processors would support this division because growing U.S. OJ demand also benefits because growing U.S. OJ demand also benefits them them

• -This would provide the FDOC increased funds for

This would provide the FDOC increased funds for the U.S. market with no increase in Florida the U.S. market with no increase in Florida growers growers’ ’ taxes taxes

Scenario Two Scenario Two

• Marketing board would consist of equal

Marketing board would consist of equal representation from Florida and Brazil representation from Florida and Brazil

Scenario Two Scenario Two

• Another benefit of this strategy would be much

Another benefit of this strategy would be much higher fruit and bulk juice prices for both Florida higher fruit and bulk juice prices for both Florida and Brazil and Brazil

• -Increased generic marketing that increases

Increased generic marketing that increases demand in both the U.S. and Europe in an demand in both the U.S. and Europe in an environment where fruit supplies are limited due environment where fruit supplies are limited due to HLB would increase prices to HLB would increase prices

• -After probably about 5 years, citrus would be

After probably about 5 years, citrus would be profitable enough to encourage replanting profitable enough to encourage replanting without the federal funding without the federal funding

Scenario Two Scenario Two

• The result: thriving and profitable Florida

The result: thriving and profitable Florida and Brazilian citrus industries and Brazilian citrus industries

Two Potential Challenges Two Potential Challenges

• One

One – – to get the Florida and Brazilian to get the Florida and Brazilian citrus industries to agree and cooperate on citrus industries to agree and cooperate on this this

• Two

Two – – legal barriers due to potential price legal barriers due to potential price collusion and fixing collusion and fixing – – the world marketing the world marketing board would represent virtually all the board would represent virtually all the supply to 90% of the world OJ market and supply to 90% of the world OJ market and its generic advertising and merchandising its generic advertising and merchandising programs programs

• 6

6

Thank you! Thank you!