If last year was defined by unprecedented volatility across many markets, the first half of 2017 tells a seemingly different story. Processors across a number of the key growing regions are signalling cause for cautious optimism in the coming months.
Our Procurement Team have been travelling around the citrus groves and processing operations of Brazil to understand what’s happening on the ground. In spite of political and economic uncertainty, a less challenging season for orange is hopefully on the horizon, with Brazil enjoying the first bumper orange crop in six years and processors forecasting strong uplifts on last year’s crops.
Unpredictable weather fronts continue to be the primary catalyst for market changes. Cold periods, followed by dry weather and then sudden downpours have resulted in a challenging lemon market after months of stability. Whilst ongoing wet conditions being experienced in the Far East have not been kind to the summer harvests providing the raw materials for many of our essential oils and their chemical ingredient derivatives.
The market is starting to show signs of easing as the Brazilian crop gets underway. Although we ask ourselves how will this offset the abysmal 2016 crop which resulted in global juice and oil inventories at all-time lows?
Orange prices remained very firm throughout the first quarter of 2017. It was only during the latter part of the second quarter that the market began to ease and indications of softening prices began to show themselves. D-Limonene has followed the same pattern as orange oil and expectations are that will continue. It’s clear the remainder of 2016 juice and oil contracts will be first in line to be fulfilled from new crop production, certainly for the first quarter of the season, after which we will start to see new crop negotiated oil despatched September/October. It is after this backlog, and we look toward the fourth quarter (Oct - Dec) when we envisage the mist of uncertainty will start to clear.
Brazil June 2017: Trip to our Processing Alliances
Over 4,000km covered during a very exciting week
Brazil’s political situation remains very volatile as both the current and previous presidents are under investigation for corruption. This has left a real feeling of doubt among the people and trepidation of what lies ahead for their economy.
Commercial interest rates are also proving extremely challenging for the smaller processors in borrowings and payback terms to banks. The latest projection suggests a 51% uplift on 2016 crop. Based on 175 million trees each yielding ~2-2.5 boxes of fruit, the crop estimate of 360 million boxes seems credible. Allowing for ~55 million boxes earmarked for the fresh fruit market, we then expect 300 million boxes to be processed. It must also be remembered that pipelines need to be refilled before the full effect of this volume can be felt.
We are still conscious too that although HLB (Huanglongbing, Greening) is being much more proactively managed in Brazil, there is still no cure. The region of Sao Paulo produces 80-90% of all Brazilian oranges but HLB is now present in 17-25% of the groves in the main citrus belt of the state. The smaller producing regions such as Castelo, a region in South Sao Paulo state, or those in the state of Rio Grande do Sul still have little to no infected groves (0-2%).
However it’s very refreshing to see Brazil is taking the approach it is, in that as soon as an infected tree is identified, it’s removed and a new tree is planted almost immediately. There are continuous monitoring and identification procedures in place, and alongside the traditional remove-and-replace strategy there are other, more innovative projects underway to identify HLB at earlier stages like infra-red imaging taken from airborne drones and geo-tracking of plants.
Denser tree population is another technique being used to combat HLB, which is also improving fruit yield per hectare. The number of farms is generally reducing, however total acreage remains about the same as the size of farms increases. Drop rate has reduced year on year and the fruit looks to be a good size but there has been a delay of fresh fruit to some processors due heavy rain fall (May) where up to 200mm has fallen in certain regions. We also need to remember although we are expecting a bumper crop, it consists of a good number of young trees yet to mature and produce full commercial volumes, so the yield these trees will generate is unknown, as is the overall quality of the crop in general.
The processors we are speaking to are positive about this year’s crop and their thoughts were consistent. As is often the case early in the season there are varying numbers of boxes to yield 1kg of oil (ranging from 7-16) but this, like the tree fruit yield, is all important to the eventual amount of oil a season generates. This year it is estimated 40,000mt of cold pressed orange oil (CPOO) will be produced with an optimistic aldehyde expectation. We expect it to follow the typical bell curve with Sao Paulo fruit processors already seeing fairly good oil quality.
It’s clear the Brazilian juice market is still heavily weighted towards concentrate (FCOJ) which accounts for 80% of the volume produced vs 20% not from concentrate (NFC). This is interesting considering juice consumption is generally falling apart from certain emerging markets. Despite the headlines about increasing consumption of NFC there was little indication from the smaller processors of a change of course due to the requisite investment in logistics; movement of one drum of FCOJ is equivalent to seven of NFC. However, at least two of the larger plants are scaling up their production, investing in significant new tank space and vessels in order to compete more in the taste-preferred NFC markets. All bar one processor we met was juice focussed, however the co-products (CPOO, limonene, oil phase and water phase) remain extremely important revenue streams with some considering them the profit centre offsetting the juice cost centre.
It was only a few short months ago, when the supply situation was tougher, that fruit box prices were Brazilian Real (R)26-28/box where now they are around R16-18/box. The completion of these contracts is another reason why oil price graphs will not follow the same gradient down as they did on the way up. All in all we remain optimistic for this season; however there are many macro factors that can influence this market very quickly.
We are anticipating a recovery in the South African crop this year to around 100m boxes, 10% up from 2016, but being some 40% down from its typical averages. With only 5-10% of fruit being processed South Africa continues to exert only a small influence over the global juice and oil markets.
The latest USDA forecast released 12th July; the final of the 16/17 crop season suggests a slight increase of 0.2m boxes to 68.7m as HLB continues to spread devastatingly throughout the state and the recovery response of planting new crops has been insufficient.
Mexico is becoming a larger player despite the majority of their oranges still going to the fresh fruit market. Processing volumes grow year on year and we estimate this year they will produce 5,000mt of CPOO.