Prices of orange juice concentrate on the futures market have been on the way down over the past three weeks, following a dramatic rise since the start of 2009.
Prices currently stand at just over $1.70 per pounds solid which is not far off the peaks of 2006/2007 and 1989/1990 and around $1 above the lows of two years ago.
Better crop forecast
The latest dip in prices comes on the back of an increase in the US Department of Agriculture estimate for the Florida orange crop, indicating that the freezing temperatures in December did less damage than previously thought.
Rabobank analyst Francois Sonneville told BeverageDaily.com that prices should come down further in 2011.
Sonneville attributed the jump in prices in 2010 and early 2011 to the freezing in Florida and flooding in Brazil.
As demand for orange juice is fairly sensitive to price, the analyst said it is likely that prices will go down if there are no further supply shocks. And if this year brings a good harvest then prices could drop significantly.
Long term cost increases
But Sonneville warned that there has been a structural increase in costs over the past few years and this means that long term prices are likely to stick to a higher plane than before.
One of the reasons is higher labour costs in Brazil. Orange production is labour intensive and so an increase in labour costs has a significant impact on total costs. And with Brazil continuing to develop economically, wages are unlikely to recede.
Another factor increasing long term costs is disease, which has become a major concern for orange farmers in recent years. This is a problem that is unlikely to go away and is only going to be managed and contained at a cost with fertilisers and other treatments.