Kub's Den

All the classic breakfast foods seem to have been hitting high prices at their own pace for their own reasons lately. There's bacon -- the pork belly cutout reached $244 per hundredweight in mid-August. Then there's eggs -- infamously above $4 per dozen late last year, but still elevated above 2020 levels now at $1.99 per dozen. Milk futures seem to show a market fairly well balanced between supply and demand, with October Class III Milk at $18.95 per hundredweight, which is roughly the midpoint between the 2020 low and the 2022 high. It translates to $3 for a gallon of 2% milk at my local Walmart.

A gallon of orange juice at the same Walmart, however, is more than double that price, at $6.98. The U.S. Bureau of Labor Statistics tracks monthly what average U.S. city consumers pay for a pound of frozen orange juice concentrate, and their data set has been hitting fresh record highs every month since January -- most recently $3.34 in July.

It is the futures prices, however, that show the clearest picture of bullishness in the orange juice market. Prices remain elevated above $3.00 per pound through January 2024, and the typical carry structure has inverted into backwardation, with November 2023 futures worth $9 more than January 2024 futures, emphasizing how urgently the market wants to see supplies being brought to market.

Supplies from where though? Florida was hit by Hurricane Ian in September 2022 then Hurricane Nicole in November 2022, which together damaged about a third of the state's orange groves. This damage was followed by a cold snap and just added to a long trend of producers taking groves out of production, given the expense and futility of fighting the citrus-greening disease that was spread by sap-sucking insects across both the U.S. and Brazil, making fruit from infected trees bitter and unusable. USDA pegs U.S. production of oranges for processing at only 572,000 tons in 2023, which is roughly one-seventh of what it was in 2008 (3,967,000 tons). Meanwhile, Brazilian production also dropped in 2023, although not to a record low, and given its dominant export position and rapid export business this year, the industry group CitrusBR estimated last week Brazil's frozen orange juice stockpiles are down 41%, year-over-year, to the lowest level since they began tracking data.

The orange juice market, therefore, is a perfect poster child to show what can happen to a commodity's prices when both inflation and fundamental scarcity act together at the same time. Orange juice prices would likely be elevated above previous levels no matter what, just like egg prices are still elevated despite adequate supply, or just like the price of seemingly everything is elevated in the widespread inflationary environment. But the extra $1 per pound that the orange juice market has tacked on since last fall's Florida hurricanes, above and beyond the record prices from 2012 and 2016, must be attributed to fundamental factors of supply scarcity.

It's also a poster child to show how news headlines can boost trading interest in a specific commodity market, or in commodity futures trading more generally. There has been a flurry of headlines about orange juice through August 2023 -- and more to come if the record highs keep being broken. My favorite one was: "Orange Prices Are Up Since 2020 by About as Much as Bitcoin." And we see associated flurries of trading activity on the ICE Futures exchange, although take note: even the hottest trading day for orange juice futures last month involved only 3,052 contracts changing hands during a single session. Compared to something like the corn futures market (350,000 contracts trading on a pretty average day), orange juice may seem like a very risky, illiquid market.

The grain and oilseed markets, which underpin the production of some of these breakfast foods -- corn to be fed to dairy cattle and soybean meal to be fed to egg-laying chickens -- may not have hot headlines like orange juice right now, but be prepared. Their time could come.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on X, formerly known as Twitter, @elainekub.

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