The buying and selling of FCOJ have evolved into
com mod i ty trading. Two of the largest Bra zil ian bulk juice pro duc ers, Louis Dreyfus and Cargill (both also producing in the USA), are ma jor com- modity trading com pa nies active in sev er al other fi elds besides cit rus. They have in fl u enced the trad- ing of cit rus on the com mod i ty trade market.
Commodity products, which are usually sup- plied in well-defi ned units, can be traded on the “fu tures” market. “Futures” are con tracts agreed for the fu ture delivery of a phys i cal com mod i ty, such as FCOJ. Cash price is the price at which the actual com mod i ty is sell ing for.
Risk management and price setting
The futures market provides a means of man- ag ing risk for the citrus industry, a way for all in volved to hedge (protect against fi nancial loss) their risk ex po sure caused by fl uctuations in cash prices for prod ucts. Fu tures markets re quire the participation of both hedgers (risk shifters) and speculators (risk assumers). Hedg ers are those in the citrus industry, such as fruit processors and sellers, who transfer unwanted risks associated with their normal com mer cial activities. Spec u - la tors (nonproducers/proc es sors) seek fi nancial gain by cor rect ly predicting chang es in future price moves. The spec u la tive ac tiv i ty provides the fi nance required to car ry out com mer cial hedg es. In addition to risk shift ing, the fu tures markets also sets the value for one pound of FCOJ solids, known as price dis cov ery.
Trading of FCOJ futures takes place through the Cit rus Associates of the New York Cotton Ex change, NYCE. This nonprofi t organisation pro vides the physical lo ca tion where FCOJ fu- tures and options are traded (by voice and hand signals), and oversees the regulations governing all trans ac tions. It forms part of New York Board of Trade, NYBOT. The reg u la tions defi ne quanti- ties of FCOJ to be con tract ed and the time periods allowed for trade and de liv ery of contracts (every other month). Grade stand ards for product quality, as well as product iden ti fi ca tion and inspection, are also spec i fi ed in the reg u la tions.
UNITS USED FOR BULK JUICE TRAD ING
On the world market, frozen concentrates of Bra zil ian and other origin are usually traded per metric tonne product, with prices given as USD/tonne concentrate. In the USA, however, the ba sic unit for pricing or ange fruit, single- strength juice and FCOJ is the content of soluble sol ids (in principle the sugars), not the weight or vol ume of product. The unit used is lb. soluble sol ids. The US futures market also use lb. sol u ble solids to defi ne product quantity. The following approximate factors can be used when converting prices:
For FCOJ of 66 °Bx
1000 USD/t conc. 0.70 USD/lb solids 1430 USD/t conc. 1.0 USD/lb solids For NFC juice of 11.8 °Bx
1000 USD/t juice 3.82 USD/lb solids 260 USD/t juice 1.0 USD/lb solids 3.3 FCOJ commodity trading and the futures market
3.4 Import duties and juice imports
In 2004, a new form of futures contract was introduced that recognised the Florida/Brazil origin of FCOJ in order to more correctly follow cash market transactions, which tend to value FCOJ from Florida and Brazil differently to that of other origins.
The futures market is important to the citrus in dus try, not only as a tool for risk man age ment but also as a price basis for purchasing fruit and for sales con tracts for bulk con cen trate. The NYCE provides hedging opportunites for citrus industry players active in Florida, but there is no similar futures exchange providing risk manage- ment in São Paulo.
The profi t of bulk juice proc es sors comes from the price difference between the fruit and con cen trate. There fore they must posses good skills in mar ket ing a com mod i ty prod uct and risk management.
In addition to long-term sales contracts there is also a spot market for FCOJ, delivered from tank stor age and in drums. Trade on the spot market is high when price levels are unstable.
Products on the spot market may be of less well-defi ned quality or prod uct specifi cations and thus command lower pric es. During periods of depressed retail prices for orange juice, juice pack ers may be forced to acquire large vol umes of such juice on the spot market.
3.4 Import duties and
juice imports
There have been long-lasting negotiations be- tween trading blocs aimed at reducing trade barriers and promoting freer trade, including that of citrus products. Examples are the GATT (General Agreement on Trade and Tariffs) where major agricultural agreements were established in the Uruguay round of talks held in 1994. The North American Free-Trade agreement, NAFTA, intended to reduce trade barriers between USA, Canada and Mexico was reached in 1994.
Work on a similar agreement to also include all countries in South and Latin America, Free-Trade Area of the Americas or FTAA, was initiated in 1998. Although scheduled to come into force in 2005, the participants are still discussing many issues involved with the agreement. Since both Brazil and Florida, the major orange juice regions, are part of the FTAA, the agreement would have a signifi cant impact on orange juice trade. The Florida citrus industry are carefully evaluating the likely impact on Florida orange growers and the juice market.
SOME TERMS USED WITH TRADE TARIFFS
Ad Valorem tariffs: duty calculated as a per- cent age of the value of the im port ed product. Freight costs are in clud ed in the product value. Specifi c tariffs: a duty of a fi xed amount of mon ey per unit of juice in de pend ent of the value of the product.
Quota: defi ned maximum quantity of product which is allowed, e.g. at a lower import duty. SSE or single-strength equivalent: FCOJ cal cu lat ed as the volume of juice it would yield when reconstituted to sin gle-strength juice. GATT: General Agreement on Trade and Tariffs. NAFTA: North American Free Trade Agreement.
For orange juice, there are quite large dif fer enc es in import duties between the various im port ing coun tries. Du ties often depend on the exporting coun try, for ex am ple, several ex port ing countries have agree ments with respective importing markets which en a ble duty-free or re duced im port tariff. In general, how ev er, such agree ments do not apply to the major ex port ers, Bra zil and the USA.
The US “duty drawback” procedure favours the export of juice from the US. In the duty draw back sys tem juice exporters/importers can re cov er the im port duty paid for a certain vol ume of juice if they export the same volume and kind of product. US im port duties dis tin guish between
Fig. 3.6 Consumption of packaged orange juice in certain regions, 2003.
Source: Euromonitor Million litres 240 0 1000 2000 3000 4000 5000
USA/Canada W Europe Asia/Pacific S&C America
4341
2451
1206
Fig. 3.5 The major juice import markets.
Source: FAO Years Thousand tonnes 0 500 1000 1500 2500 2000 3500 3000 1996 1997 1998 1999 2000 EU USA/Canada Japan Others
FCOJ and NFC. Tar iffs are high er for FCOJ than NFC (calculated as sin gle-strength juice.)
In general, citrus growers and fruit proc es sors re ceive little or no subsidies. Within the EU, how- ev er, signifi cant subsidies are paid to orange proc- essors who purchase fruit from EU fruit grow ers at the min i mum recommended fruit pric es.
The European Union is the largest juice import mar ket, followed by the USA. The relative siz es of the major juice import markets are shown in Figure 3.5. The consumption of pack aged or ange juice per re gion is shown in Figure 3.6.
3.4.1 IMPORT DUTIES WITH SOME TYPICAL EXAMPLES
European Union
Tariffs for orange juice imported into the Eu- ro pe an Union vary greatly depending on the exporting coun try. The dominant share of juice imported into Eu rope comes from Brazil and is subject to import duty for Most Favoured Na tion (MFN). This duty, which was 20 %, has grad u al ly been lowered under GATT, and is differentiated according to the degree of concentration and temperature.
EU import duties are ad valorem (a fi xed per- cent age of the product value including freight). Some im port tar iffs in ef fect in 2002 are presented in the list be low:
• From EU countries and some non-EU Medi- terranean countries, 0 %
• Mediterranean Basin Preference (mainly Israel and Morocco) – within quota, 2.3 % – exceeding quota, 5.7 % • Lomé convention countries, 0 %
(African, Caribbean incl. Belize and Costa Rica, Pacifi c)
• Most Favourable Nation (MFN) tar iff
(applies to countries such as Brazil and USA) – FCOJ at -18 °C, 15.2 %
– FCOJ at -10 °C, 12.2 % • Mexico
– within quota for FCOJ, 3.8 %
– exceeding quota imported at MFN tariff USA
Import duties are specifi c in the USA. The rates, dif fer en ti at ed for FCOJ and NFC, are giv en as a fi xed fee per pound of soluble solids. Some of the current du ties, converted to US dol lars per 100 litres sin gle-strength juice, are giv en in the list below. Most US juice im ports are as FCOJ and the largest ex port er is Brazil, which is subject to full MFN duty.
• Caribbean Basin Initiative benefi ciary coun- tries (e.g. Belize, Honduras, Costa Rica), 0 % • Israel (as of 1995), 0 %
• Mexico
Phasing down to duty-free unlimited im port by 2008 (NAFTA agreement)
For 2003:
– within quota for FCOJ, 4.6 USD/100 l SSE – within quota for NFC, 1.8 USD/100 l SSE • Most Favoured Nation (e.g. Brazil)
FCOJ 7.9 USD/100 l SSE NFC 4.5 USD/100 l SSE
The USA implements a “duty drawback” pro- ce dure. This allows US importers of FCOJ who also ex port FCOJ or reconstituted orange juice to be re im bursed 99 % of the import duty paid on the same quantity of im port ed concentrate as was exported within a 3-year period. NFC exports are not el i gi ble for draw back against imported FCOJ.
Canada
Canada allows orange juice concentrate to enter duty-free but levies import duty on single- strength juice. All juice imports from NAFTA countries (USA and Mexico) are tariff-free. Japan
Until 1979 there was little fruit juice import into Ja pan due to very low import quotas. The quo tas were gradually increased until they were re moved al to geth er in 1992. Import duties are ad valorem.
• Most Favoured Nation tariff FCOJ, 25.5 % Republic of Korea
Until 1989 juice imports were re strict ed by very low quota. Following GATT agreement, quotas for orange juice imports were removed in 1997. • Most Favoured Nation tariff for FCOJ and
juice ad valorem, 55 % China
Following China’s WTO entry, tariffs for imported orange juice have decreased signifi cantly. Tariffs are ad valorem:
• Frozen juice Most Favoured Nation tariff, 7.5 %