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The World Market for Citrus Products and Risk Management for Florida Citrus Growers1 Thomas H. Spreen and Ron Muraro2 1. This is EDIS document FE 195, one of nine papers in the 1999 Citrus Risk Management Series, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. Published October 2000. Please visit the EDIS website at http://edis.ifas.ufl.edu. 2. Thomas H. Spreen, professor, Department of Food and Resource Economics, University of Florida, Gainesville, FL; and Ron Muraro, professor, University of Florida, Citrus Research and Education Center, Lake Alfred, FL. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean. Introduction The United States is the world's second largest producer country, with Florida being the largest citrus producing state within the United States. Florida specializes in the production of oranges processed into orange juice and grapefruit, which is utilized for fresh and processed markets. Florida also produces a large quantity of tangerines, tangelos, and other varieties intended for the fresh market. These markets, however, tend to be dominated by California and are subject to, at the present time, little competition from foreign suppliers. This paper will focus on the world market for orange juice. The World Orange Juice Market The states of Sao Paulo in Brazil and Florida in the United States together produce approximately 85 percent of the world's orange juice. Mexico, Belize, Costa Rica, Cuba, and Honduras are other countries in the Western Hemisphere that also produce orange juice for export. Although their primary market is fresh, both Spain and Italy supply orange juice to the European Union. World production of orange juice by country is shown in Table 1. The United States is the largest processed orange consuming country in the world. Canada is also a large market, despite its relatively small population, with a per-capita consumption that rivals that found in the United States. The other countries of the Western Hemisphere, however, do not have a significant consumption of orange juice. Consumers in these countries still buy oranges in fresh form and produce orange juice at home. Thus nearly all of Brazil's orange juice production is exported. Outside of the Western Hemisphere, the European Union is the major orange juice-consuming region. Consumption of orange juice in the major consuming regions of the world is shown in Table 2. Table 3 provides detailed information on the orange crops in Sao Paulo and Florida. In this table, the last three seasons are shown with orange production, processed utilization, and orange juice production for each region. The orange crop in Sao Paulo is much larger than that produced in Florida; however, while processed utilization in Sao Paulo ranges from 70 to 75 percent of the crop, processed utilization in Florida is over 90 percent. Higher processed utilization combined with higher juice yields allows Florida to challenge Sao Paulo as the
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 2 world's largest producer of orange juice. In the 1999-2000 season, 1.42 billion SSE gallons of orange juice were produced in Florida, compared to 1.7 billion SSE gallons in Sao Paulo. Orange juice production in both regions has risen rapidly over the decade of the 1990s. With lower prices, however, production growth has slowed. A viral disease, CVC, which tends to attack young trees, has also affected Sao Paulo. Although CVC has not yet reduced the orange crop in Sao Paulo, it is expected that, over the next few years, Sao Paulo will experience some contraction in its orange production resulting from CVC. Citrus canker has also caused the removal of orange trees in Sao Paulo, although the production impact of canker will likely be smaller than CVC. There is also concern regarding citrus canker in Florida. At the present time, only a few findings of canker have occurred in the main orange producing area; it is too early to ascertain the possible impact of citrus canker on Florida. The Impact of Not-From-Concentrate Orange Juice The introduction of not-from-concentrate orange juice, also known as NFC, into the orange juice markets of the United States and Canada has been one of the most important phenomena of the 1990s. Consumption of NFC in the United States has increased from less than 200 million SSE gallons in 1990 to over 600 million SSE gallons in the 1999-2000 season (Table 4). Much of this growth has occurred despite the fact that the retail prices of NFC have remained relatively stable during the 1990s. The widespread acceptance of NFC by North American consumers has been unexpected and requires a change in the understanding of the world orange juice market. The growth of NFC consumption in the United States and Canada affects world trade in orange juice in that nearly all of the NFC consumed in North America is produced in Florida. Mexico has exported small quantities of NFC to the United States (less than four million SSE gallons), but to-date, very little NFC has been shipped from Brazil to the United States. As such, an increasing share of Florida's orange crop has been allocated to NFC. In the last three seasons, over 40 percent of Florida's orange crop has been sent to the NFC market, with that figure reaching nearly 50 percent in the 1998-1999 season (Florida Citrus Processors Association). Nearly all of the frozen concentrated orange juice (FCOJ) traded in the world is first concentrated to either 65 or 66 degrees Brix. At this level of concentration, seven parts water must be added to reconstitute the juice to the single strength equivalent. NFC, on the other hand, is never concentrated. Thus, to ship an equivalent volume of NFC, compared to FCOJ, seven times the volume must be shipped. As a result, transportation costs become an increasingly important component of the final cost of NFC. An important implication of the establishment of a large-scale NFC market in the United States and Canada is that, for the present, the Florida processed orange industry has been able to differentiate its product from that produced elsewhere and, thereby, partially insulate itself from import competition. Consumption of NFC has begun in both Canada and the European Union. Given Canada's proximity to the United States, it is not surprising that Canadian consumers have begun drinking NFC; however, data are unavailable regarding the breakdown of orange juice consumption in Canada. A similar problem exists for the European Union. While data are available on imports of orange juice into the EU, the composition of imports is unknown. U.S. export data indicated that approximately 50 million SSE gallons of NFC were exported from the United States in 1999. Nearly all U.S. exports are sent to Canada and the European Union. Tariffs and the World Orange Juice Market Three of the largest orange consuming regions levy tariffs on imported orange juice. In this section, those tariffs are reviewed. Recently, these tariffs have been reduced as negotiated in the Uruguay Round of GATT. The most-favored-nation (MFN) FCOJ tariff schedules for the United States, the European Union, and Japan are shown in Table 5.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 3 The United States allows the importation of orange juice duty-free to those countries identified under the Caribbean Basin Economic Recovery Agreement (CBERA), also known as the Caribbean Basin Initiative (CBI). CBERA countries that currently export orange juice to the United States include Costa Rica, Belize, Honduras, and the Dominican Republic. Even though these countries currently enjoy duty-free access to the United States, their share of both U.S. imports and the U.S. orange juice market remains relatively small. In 1999, imports from these countries totaled 32.23 million SSE gallons, which was nine percent of total U.S. imports and approximately two percent of total U.S. orange juice consumption. Under the North American Free Trade Agreement (NAFTA), both the United States and Mexico agreed to phase out their tariffs on orange juice imports over a 15-year period, beginning in 1994. At the time the agreement was signed, Mexico levied a 20 percent ad valorem duty on imports of orange juice, even though very little was imported. Mexico's exports to the United States were subject to the MFN tariff, which, at the time the agreement was implemented, was US$.35 per SSE gallon for FCOJ and US$.175 per SSE gallon for NFC. Imports of orange juice from Mexico had been increasing before NAFTA was implemented, which raised fears in Florida that reductions in the U.S. orange juice tariff would result in massive increases in Mexican juice exports. To allay these fears, a rather complicated arrangement was negotiated under which Mexican exporters were granted a tariff rate quota of 40 million SSE gallons at one-half the prevailing MFN tariff, or US$.175 per SSE gallon. Exports above 40 million SSE gallons are charged a higher tariff that declines over a 15-year period, reaching zero in 2008. A snapback provision was built into the agreement that was intended to protect against "surges" of orange juice imports from Mexico. In the snapback provision, if both price and quantity triggers are crossed, then over quota imports would be charged the MFN tariff rate. NAFTA was implemented on January 1, 1994. The Uruguay Round of GATT was completed in mid-1994, with its provisions put into effect beginning January 1, 1995. Since the GATT agreement was to reduce the MFN orange juice tariff by approximately 15 percent over six years, the NAFTA tariff schedule was revised to conform to GATT. The revised NAFTA tariff schedule is shown in Table 6. NAFTA and Orange Juice Trade between the United States and Mexico Mexico has a long history of orange production. The Spaniards brought citrus production to Mexico in the seventeenth century, just as they had introduced orange production to Florida. In the early twentieth century, Mexico's citrus industry thrived in northern Mexico in the state of Nuevo Leon, not far from the citrus producing region of Texas. The freezes that visited Florida and Texas in 1983 and 1985 also devastated much of the industry in Mexico. As a result, the industry in Mexico moved south into the states of San Luis Potosi and Veracruz which now are the largest citrus producing states in Mexico. The move southward, however, means that small farmers, many of whom are located on public lands called ejidos, now produce a large proportion of Mexican citrus. These producers tend to lack both education and access to capital, resulting in citrus groves with low levels of technology. As such, both yield and fruit quality are poor compared to that found in Florida and Sao Paulo. With the high prices that resulted from the freezes of the 1980s, Mexican citrus has experienced a major expansion. Table 7 shows orange production in Mexico, along with fresh and processed utilization from the 1985-1986 through 1998-1999 seasons. Over this period, Mexican orange production has nearly tripled, increasing from the freeze-affected level of 1.4 million MT in 1985-1986 to nearly 4 million MT in the 1997-1998 season. Drought severely curtailed production in 1998-1999. Despite the major expansion of orange production in Mexico, processed utilization has remained relatively flat. As such, processed utilization, as a percentage of total production, has declined from a peak of nearly 25 percent in 1989-1990 (the last major freeze in Florida) to only
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 4 11 percent in 1997-1998. One could infer that the Mexican citrus industry appears to be geared for its domestic market. It allocates an increased proportion of fruit to processing for export in those years when export prices are high. Imports of orange juice into the United States for 1985-1999 by country of origin is shown in Table 8. The first year shown in Table 8 is significant because it marked the peak of orange juice imports into the United States after the major freezes of the 1980s. As orange production in Florida recovered, imports declined. Despite the signing of NAFTA, it can be seen that Mexico has not been able to gain market share in the U.S. orange juice market; it remains a minor supplier accounting for five to seven percent of U.S. imports and two to four percent of total U.S. consumption. A reasonable question is: Why has Mexico failed to increase its exports of orange juice to the United States despite the expansion of orange production in the country? There are several plausible answers to this question. First, despite the increased access granted by the United States to Mexico to its orange juice market, the preferences granted Mexico represented a relative small share of total U.S. orange juice consumption. The TRQ of 40 million SSE gallons represents less than three percent of total U.S. consumption. The over-quota tariff will not begin to substantially decline until 2003. Second, Mexico's orange industry is fragmented and plagued by a lack of coordination between growers and processors. For the most part, it is an industry that is geared to serve its domestic market, whose standards are low compared to the international market. As such, juice quality is poor compared to that produced in Florida or Sao Paulo. Third, the investment by four of the five large Brazilian-based processors in Florida served to further solidify the linkages between Sao Paulo and Florida. In a sense, Mexican citrus processors have been left out. As such, they have become residual suppliers to the U.S. market. It would be premature to write-off the Mexican citrus processing industry. The large reductions in the U.S. orange juice tariff under NAFTA will begin to occur beginning in 2003. There has also not been a major freeze (or other supply reducing event) in Florida since the implementation of NAFTA. With the rapid growth of NFC consumption in the United States, another opportunity has been presented to the Mexican industry. To date, however, only a small quantity of NFC has been imported from Mexico. (For additional reading on the Mexican citrus industry see Mondragon et al, 1998.) Given its location, Mexico is a logical alternative to Florida to supply NFC to the United States, especially west of the Mississippi River. FTAA and the Florida Orange Industry The proposed Free Trade Area of the Americas (FTAA) would create a free-trade zone that would encompass nearly all of the countries in the Western Hemisphere. These countries presently have a combined GDP in excess of US$10 trillion, which would make the FTAA the largest free-trade zone in the world. Given the importance of both Brazil and Florida to the world orange juice market, it is clear that implementation of FTAA would have serious ramifications for both producers and consumers of orange juice. Smaller producing countries such as Mexico, Belize, Costa Rico, and Honduras would also be affected since these countries currently all enjoy preferential access to the U.S. orange juice market. As noted by Muraro et al., orange producers in Sao Paulo currently enjoy a sizable advantage in the cost of production, compared to Florida. Muraro et al. estimate that delivered-in production costs are $.43 per pound solid versus $.77 per pound solid in Florida. The current U.S. tariff on imports of FCOJ from Brazil is currently 28.7 cents per pound solid. Transportation costs plus the Florida equalization tax total approximately $.10 per pound solid. Thus the total estimated cost of Brazilian FCOJ delivered to Florida with all taxes and tariffs paid is approximately $.81, which is still slightly larger than comparable costs in Florida. It is clear, however, that the tariff accounts for a substantial portion of the cost to Brazilian processors of FCOJ delivered to the United States.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 5 If the U.S. tariff on orange juice were to be removed, not all of the tariff savings would accrue to Brazilian exporters. Brazil has a large market in Europe, which, in recent years, has grown to nearly one billion SSE gallons. As shown in Table 5, the tariff imposed by the EU on orange juice imports is 15.2 percent ad valorem. At current prices, the U.S. tariff is comparable to an ad valorem tariff of 40 to 50 percent. If the U.S. tariff was eliminated, Brazil would shift exports from Europe to the United States, which would cause the U.S. price to decline and prices in Europe to rise. This process would continue until a new price equilibrium is established. The impact on Florida would be muted because Brazil would be unable to supply the NFC market. It is clear, however, that the U.S. orange juice tariff supports the price of orange juice in the United States, and returns to Florida growers would decline if the tariff was eliminated. Conclusion World orange juice consumption and trade have shown remarkable growth over the past two decades. After major freezes destroyed many orange trees in Florida in the 1980s, the high prices that followed have spurred a major expansion in orange production in both Florida and Sao Paulo, Brazil. These two regions continue to dominate the world market for orange juice, collectively accounting for approximately 85 percent of world production. The United States remains the largest market for orange juice in the world although consumption in the European Union continues to grow. Canada is also a major destination for orange juice. Consumption growth in Japan has been disappointing. The increasing acceptance of not-from-concentrate orange juice has changed the face of the orange juice market. Approximately 40 percent of the orange juice consumed in the United States is NFC. Despite the turmoil stimulated by the negotiation and implementation of NAFTA, there has not been a significant increase in orange juice imports from Mexico into the United States. One reason is that Florida orange juice production has experienced a strong recovery after the freezes of the 1980s. Another reason is the lack of new investment in Mexican citrus which has left the processing sector in Mexican well behind their counterparts in Florida and Sao Paulo. The U.S. orange juice tariff helps support the price of orange juice in the United States and positively affects grower returns. Because the total cost of producing orange juice in Sao Paulo is lower than the cost in Florida, the tariff protects Florida growers from imports from Brazil. The evolution of NFC consumption in the United States means that Florida has been able to develop a differentiated product, which is costly to ship from Brazil. The continued growth of orange juice consumption around the world is a positive factor for growers in Florida and Sao Paulo. Rising consumer income in Latin America, China, and Eastern Europe all bode well for the future of the orange juice industry. References Florida Agricultural Statistics Service. Citrus Summary. Various issues, Orlando, FL Florida Department of Citrus. "Citrus Reference Book." Economic Research Department, Department of Food and Resource Economics, University of Florida, Gainesville, FL, 1999. McClain, Emily A. "A Monte Carlo Simulation Model of the World Orange Juice Market." Unpublished Ph.D. dissertation, University of Florida, 1989. Mondragon, J.P., Thomas H. Spreen, Chris O. Andrew, and Ronald P. Muraro. The Oranges of Eastern Mexico: An Economic Analysis of Its Production and Marketing System. Lake Alfred, FL: Florida Science Source, 1998. Muraro, Ronald P., Thomas H. Spreen, and Fritz M. Roka. "Focus on Brazil." Citrus Industry 81, no. 1 (January 2000): 20-22. Spreen, Thomas H., and Juan Pablo Mondragon. "The Tariff Schedule for Imported FCOJ." Citrus Industry 77, no. 10 (October, 1996): 10-12.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 6 United States Department of Agriculture, Foreign Agricultural Service (FAS, USDA). "Citrus Annual Report." Sao Paulo, Brazil, U.S. Consulate, 1999.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 7 Table 1. Processed orange production by country, 1995a. Country Production (1,000 MT) Brazil 10,040 United States 8,455 Mexico 750 Italy 510 Spain 454 Greece 230 Australia 195 South Africa 166 Argentina 159 Israel 125 Costa Rica 120 Belize 117 Others 337 Total 21,658 Source: FAO a Figures presented are in fresh fruit equivalent. Table 2. Processed orange consumption by country, 1995a. Country Consumption (1,000 MT) Per Capita (kg) United States 10,327 38.93 European Union 9,297 25 Canada 1,216 41.35 Switzerland 297 41.45 Mexico 294 3.23 Japan 208 1.66 Argentina 184 5.28 Others 1,383 N/A Total 23,206 4.37 Source: FAO a Figures presented are fresh fruit equivalent.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 8 Table 3. Estimated utilization of oranges and orange juice production in Florida and Sao Paulo, 1997-1998 through 1999-2000 season. Product Florida (U.S) Sao Paulo (Brazil) 1997-1998 1998-1999 1999-2000 1997-1998 1998-1999 1999-2000 Orange production (mil boxes) 244.0185.7231.0 420342395 Fresh (mil boxes) 22.214.171.124 10062100 Processed (mil boxes) 232.8174.9222.0 320280295 Juice yield (SSE gal/box) 6.276.476.25 5.895.755.85 Orange juice production (mil SSE gal) 1,486.8a 1,154.6a 1,420.5a 1,884.2 1,609.9 1,726.8 a Includes approximately six million boxes of speciality frut processed into juice. Table 4. U.S. consumption of orange juice by category, 1988-1989 through 1999-2000 seasons. Season FCOJ Reconstituted Chilled OJ NFC Totala Million SSE Gallons 1988-1989 532.5 518.4 174.3 1,249.2 1989-1990 450.6 452.5 176.9 1,102.5 1990-1991 444.9 451.2 183.1 1,098.8 1991-1992 438.6 462.2 212.6 1,133.7 1992-1993 454.0 525.6 277.2 1,276.7 1993-1994 452.1 576.6 328.6 1,378.5 1994-1995 413.8 586.8 352.9 1,372.0 1995-1996 382.4 601.8 378.3 1,380.7 1996-1997 354.3 657.5 402.2 1,431.4 1997-1998 351.8 724.8 511.7 1,606.0 1998-1999 305.4 680.1 565.4 1,568.3 1999-2000b 267.7 661.4 629.9 1,574.8 Source: Florida Department of Citrus a Includes a small amount of canned and fresh squeezed OJ consumption b Forecasted values
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 9 Table 5. FCOJ tariff schedule for major orange juice importing countries under GATT. Year United States Europe Japan cents/SSE gal. ad valorem 1994 35.01 19 30 1995 34.13 18.37 29.25 1996 33.24 17.74 28.50 1997 32.36 17.10 27.75 1998 31.48 16.47 27.00 1999 30.59 15.84 26.25 2000 and beyond 29.71 15.20 25.50 Source: Spreen and Mondragon Table 6. Tariff rate schedule for imported Mexican orange juice under NAFTA. Year FCOJa SSOJb In-quota ratec Over-quota Snapbackd In-quota ratee Over-quota Snapbackd cents per SSE gallon cents per SSE gallon 1994 17.5 34.1 35.0 10.0 18.7 20.0 1995 17.5 33.3 34.1 10.0 17.4 18.7 1996 17.5 32.4 33.2 10.0 16.1 17.0 1997 17.5 31.5 32.4 10.0 14.7 17.0 1998 17.5 30.6 31.5 10.0 13.4 17.0 1999 17.6 29.8 30.6 10.0 12.0 17.0 2000 17.5 29.7 29.7 10.0 10.7 17.0 2001 17.5 29.7 29.7 9.4 9.4 17.0 2002 17.5 29.7 29.7 8.0 8.0 17.0 2003 17.5 29.7 29.7 6.7 6.7 17.0 2004 17.5 23.8 29.7 5.3 5.3 17.0 2005 17.5 17.8 29.7 4.0 4.0 17.0 2006 11.9 11.9 29.7 2.7 2.7 17.0 2007 5.9 5.9 29.7 1.3 1.3 17.0 2008 0 0 0 0 0 0 Source: North American Free Trade Agreement (NAFTA), Office of the U.S. Trade Representative. a Frozen concentrated orange juice; b Single strength orange juice. c Tariff on first 40 million SSE gallons of FCOJ imports from Mexico. d Tariff on imports from Mexico exceeding 70 million SSE gallons 1994-2002 and 90 million SSE gallons 2003-2007. e Tariff applied to first 4 million gallons of SOJ imports from Mexico.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 10 Table 7. Production and utilization of oranges in Mexico. Season Availability Utilization Fresh Processed Production Imports Exports Consumption* 1,000 metric tons 1985-19861,4100 11 1,108 291 1986-19871,6830 11 1,329 343 1987-19881,9420 9 1,533 400 1988-19892,2691 8 1,918 344 1989-19901,9033 3 1,433 470 1990-19912,3011 25 1,887 390 1991-19922,1011 10 1,942 150 1992-19932,7011 3 2,479 220 1993-19943,1751 2 2,834 340 1994-19953,5711 10 2,812 750 1995-19963,60010 8 3,152 450 1996-19973,93114 11 3,484 450 1997-19983,91515 9 3,271 650 1998-1999 2,515 15 9 2,131 390 Source: FAS (Foreign Agricultural Service), USDA (United States Department of Agriculture) Apparent domestic.
The World Market for Citrus Products and Risk Management for Florida Citrus Growers 11 Table 8. U.S. imports of orange juice by country of origin, 1985 through 1999. Year Mexico Brazil CBERA* Total mil. SSE gallons 1985 9.17 562.45 6.95 581.71 1986 32.47 527.91 8.92 574.29 1987 40.96 470.83 8.69 522.87 1988 52.38 352.84 5.45 413.28 1989 45.16 332.15 7.51 388.82 1990 63.27 390.80 13.82 472.11 1991 49.35 269.89 5.52 326.83 1992 6.59 249.70 18.68 276.88 1993 20.94 309.67 16.45 348.59 1994 45.88 321.72 17.39 387.80 1995 68.71 96.49 21.46 188.60 1996 49.70 201.71 28.50 281.51 1997 50.94 155.88 45.91 254.01 1998 67.79 188.74 40.62 298.93 1999 48.62 270.64 32.23 354.57 Source: U.S. Department of Commerce Caribbean Basin Economic Recovery Act.