Orange Juice Gets More Expensive That Oil

Commodities prices are supposed to give some sign of inflation although the value of the dollar, spot demand for certain metal and agricultural products, or the kind of feeding frenzy driving up gold can push prices higher without the normal dynamics of demand

Supply and demand for some commodities that are almost universally used in the economy is in relative balance if oil is any indication. The International Energy Agency recently reported that oil use would go up very modestly next year. Crude jumped up a small amount as the stock market rose last week, but, at $72.29, it trades in a tight range where it has been since early August. Expectations that this winter will be warm in the Northern Hemisphere are likely to keep traders a little shy about piling into futures.

The commodity that has caused the most excitement recently is orange futures, although only among the agricultural goods trading cognoscenti. The price of a pound of orange juice is up to $1.0865, or 10%, recently. The reason is that U.S. orange crop at 8.25 million tons will be down 10% from last year. The causes are low rainfall freezing temperatures. The price per pound may seem to be going up quickly, and it is. But, orange futures prices hit $2.095 per pound in March 2007. The primary reason for such a large move up then was mostly related to hurricanes. While orange futures seem high now, they are still down by almost half in only two years.

Oranges may have nothing to do with oil, but the price of crude did fall from $147 a barrel last summer to below $40 early this year. Since then, the price is up 80%, and even that has caused almost no consternation because it looked like oil could hit $200 only a little over a year ago.

Oil could easily go through another cycle in which its price moves up sharply in a short period of time. Nigerian rebels said they will begin renewed attacks on the country’s oil production facilities after a three-month cease fire. Spot interruptions of oil supply due to violence, weather, or infrastructure damage have caused crude to move up 10% or better in a day in the past. The power to price oil is moving away from OPEC. Its own members do not stick to the cartel’s oil production targets and Russia now produces more oil than OPEC’s largest member Saudi Arabia does.

China was not nearly so large a consumer of oil when the Arab Oil Embargo was put into place in 1973. The power to control oil flow is less and less with OPEC and more with nations like Russia. The consumption of oil is less and less in the developed world and more among the BRIC nations. The trading patterns of crude have changed considerably in a very short time, which almost certainly makes it temporarily more difficult to predict supply and demand and prices.

The most aggressive mainstream forecast for a rise in the price of oil is from Goldman Sachs. The investment bank believes that crude will trade at $85 at the end of this year, average $90 next year, and trade near $95 by the close of 2010. Goldman’s forecast would be for prices to go even higher except that it expects supply from the countries that were once the Soviet Union to continue to move up.

It would be irresponsible to say that oil prices could go anywhere up or down without warning like it would be to say that orange juice prices could. But, the energy world has shifted very suddenly now that China has quickly become such a critical consumer and Russia such a critical supplier. Each country has power to internally mandate production and pricing to some extent and that is very different from a world where the US, EU, UK, and Japan were the absolute center of energy consumption, and each was a free market and democratic society.

Florida orange-growers are not likely to dictate prices by forming a cartel and orange juice drinkers are not likely to boycott consuming it. Worldwide the supply and demand issues involving oil, which run from political interests to weather to civil violence, are not nearly so simple and not nearly as predictable as with the Florida’s Natural Growers society of orange farmers.

Douglas A. McIntyre