The few months since our last report have been a rollercoaster, demonstrating the volatile markets we operate in and how they can take a significant U-turn in a very short time.
Brazil and Florida
As we entered the third quarter of 2017, all indicators were positive, the market continued to show signs of easing as Brazil’s processing got underway on a forecasted bumper crop. At 364 million boxes (mbx), 51% up from the prior year, we were all excited for a less stressful year in orange. As usual, the first fruit processed was earmarked to cover outstanding contracts but in general we were anticipating, with supply and demand levelling out, some surplus of material available to the market place.
Then a category four hurricane made landfall on September 10th in the Florida Keys tracking directly up the state. Having already broken many undesirable records along the way hurricane Irma was 400 miles wide, more than twice the width of Florida at points, when it struck. It had the calamitous blend of consistent high wind gusts of 90 to 100mph, fast enough to ensure highest possible wind damage, but a land speed of only around 10 to 15mph, slow enough to significantly increase exposure time of both wind and water damage. We could only hold our breath in advance of the devastating impact she would have on Florida, its citizens and crops.
We are delighted to report no Treatt staff came to any harm and business was back up and running as usual after one day’s down time as our business continuity plan remained robust. This was a true testament to the strength of our people who all came together which was reflected time and again by the people of Florida in the days after impact.
Irma came at a time when Florida was expecting a crop of 70 to 80 mbx, which would also have been the first upswing in five years. After original assessments were made with great uncertainty, we were all poised to hear the official orange losses. The first indicator came from the USDA’s published Florida crop figures in October, which gave a forecast of 54 mbx, a 15 mbx projected reduction, which would be the smallest in 70 years. Immediately growers and other citrus agencies contested this figure, claiming an understatement in losses, suggesting the true crop would be closer to 35 mbx, which would represent a 35+ mbx loss (50%).
Both the uncertainty and projected reduction triggered a withdrawal of oil offers from all origins whilst a clearer picture emerged, causing the price to firm as buyers then took stock of their positions and exposure. The November USDA crop forecast projected a Florida crop size nearer 50 mbx as the flooding subsided and the groves became dry enough to walk through and carry out a closer assessment of the damage. It was then clear that Irma not only caused massive fruit drop but also longer-term damage to the trees in the more southern counties due to root rot, which citrus trees are very susceptible to when they remain in standing water for more than three or four days.
On a positive note, Brazil continues to process and it is believed this could well continue into February 2018. However, this could be a bitter-sweet message. The crop realisation may then topple the 364 mbx projection and prove to be nearer 370 mbx, at first glance a positive. Although we must remember fruit size is a critical factor to the volume of essential oil produced as bigger fruit means less fruit per box, so less overall surface area processed and less essential oil produced. The true position of global inventories is still unknown as buyers hold off in hope that the market settles down and finds its true level. Early projections for next season’s Brazilian crop are thought to be around 300 mbx, a 21% reduction on this season. This will only serve to reinforce the firmness in the market as the reality that it will not fall back to levels seen pre-Irma solidifies and buyers reluctantly return to the market.
In addition to this, the availability of shipping space out of Brazilian ports is proving challenging as shipping lines compete on prices to gain market share and demand starts to outweigh supply. The outlook is very much in the balance and it’s more important than ever for buyers to know their positions and assess their exposure in what is expected to be a very challenging six months ahead.
We were anticipating a recovery in the South African crop this year to around 100m boxes, 10% up from 2016, but still 40% down from typical volumes. The fact remains only 5 to 10% of fruit is being processed as the country predominantly focuses on fresh fruit exports. This origin remains a lesser contributor in the global juice and oil markets and drought continues to challenge the growing regions, although it’s thought this season has met the expectations we anticipated.
The US wasn’t the only country to suffer during 2017 hurricane season. Mexico’s growing regions were ravaged by hurricanes Katia and Franklin, which has decreased orange volumes by 15 to 20%. Mexico is becoming a larger and larger player in the global world of orange even though 80% of all fruit grown there goes to the fresh market.