The Sustainability of The Florida The Sustainability of The Florida and Brazil Citrus Industries Under and Brazil Citrus Industries Under Endemic HLB and and A Potential A Potential Endemic HLB 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- -induced declining fruit volumes and induced declining fruit volumes and HLB 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’ ’s s 1990 --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 ownership ownership --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 owned 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- -75MM box 75MM box volumes move into the 60 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- -15MM 15MM drop below economies of scale, about 12 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 -- other juices, juice blends and beverages other 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 -- on bulk juice and fruit prices on 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’ ’s profitability s profitability pressure will reduce Brazil 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’ ’s tree care than pay for the s tree care than pay for the the first year economic life of trees economic life of trees
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