Wednesday, December 08, 2010

MANDARIN ORANGE UPDATE

As most have undoubtedly read in the newspapers over the past couple of months, growth and inflation are very strong in China. The Chinese government is also trying to maintain pegged value of their currency against the dollar; however there is tremendous pressure on them to allow the yuan to appreciate. All of the above point to higher food costs from China, especially on exports.

Farmers are currently sitting on raw material thinking that the longer they wait, the higher the price will go. As the time for the packing season is limited, canneries are pushing the price trying to get raw material. Overall a viscous cycle has begun, resulting in dramatically higher prices. Canneries have produced very limited quantities to date. As of two weeks ago, one of the largest packers claims to have only packed only 50 containers where at this time last year they had produced nearly 500 containers in the same time period.

Total available raw material is said to be 25% - 35% less then last year’s pack

A labor shortage is a major factor holding back production at the plants that have raw material. With workers making higher wages working in other industries, and the overall Chinese economy “on fire”, mandarin farmers are said to be waiting until December 20th when the cotton crop comes to an end to hopefully secure more workers.

Factories will normally finish packing by Chinese New year, which falls this year on February 3, 2011 (it was 02/14 in 2010). Overall, this year the packing time will be cut by over a month given the late start and early expected finish.

Replacement costs are said to be $5.00 - $6.00 higher then last year (FOB China) which is about a 50% increase.

There will be little to no Broken Mandarins exported from China this year, as factories are concentrating on whole segments and “cells” for juice production. Spain may come into play this year for Broken requirements but so far, their price on broken is even higher than China’s price on whole.

The market will dictate if the higher prices will hold. If market pulls back on demand due to the higher costs, packers overseas may be forced to reduce their price down the road on whatever inventory they may have on hand. However, now they claim that unless a full year’s pack is not bought in advance, they won’t pack and customers will go without merchandise. As always, Supply vs Demand will dictate the market in 2011, but expect a wile ride ahead.