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published on February 06, 2007

How Brazil Became the Saudi Arabia of Orange Juice

by John Freivalds


snapshot
The Teamsters anti-Cutrale leaflet
As a former commodity trader I always look at things as “bullish” or “bearish”; i.e. good or bad for my business. So when most people look at Disneyworld as a place to go and have fun, I look at it as yet another reason to be bullish for Brazil’s expanding role in the citrus trade. And whenever a hurricane or freeze hits Florida or another shopping center or housing development goes in there, you cheer some more for the fact you have a Brazilian operation and presence.

The orange juice business in Brazil is a big sophisticated trading operation today which involves tankers ships, arbitrage, currency fluctuation, and Brazilian investments in the US-Brazil trade negotiations. Dirty politics are much involved, not to mention consumer tastes and preferences. I don’t know if you want to think about all of that the next time you have your “suco de laranja” in the morning.

I got involved in Brazilian oranges many years ago when I helped introduce Brazilian orange processors to the value of drying and exporting citrus pulp. After you squeeze the juice out, you are left with the skin and pulp. If you dry, pelletize it and ship it to Europe, you can make a lot of money selling it for animal feed. For you animal nutritionists out there, it has the feeding value of maize and enters Europe under the variable levy imposed on imported grains.

The company I worked for at the time, IS Joseph, had developed the market for Florida citrus pulp. Since we knew the game, we went down to Brazil to acquaint Brazilian processors. There is no major, confined cattle feeding business in Brazil, and the citrus pulp had little value to Brazilian cattlemen. So we set up a Brazilian subsidiary. Josco Agrícola of Brazil and I personally visited all the processors. For those of you who never leave São Paulo or Rio de Janeiro, the world’s capital of citrus processing is Araraquara, in São Paulo state. One enthusiastic frozen concentrated orange juice (FCOJ) trader once told me “Brazil is the Saudi Arabia of orange juice.” Another pundit said Brazil is the “Wal-mart of agriculture”.

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Hotels in Araraquara
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Not many Brazilians and fewer Americans know about Brazilian citrus. Brazilians don’t know because concentrated orange juice is not the prevalent juice in Brazil. Most of it is exported. Ademerval Garcia of the Brazilian citrus exporters associations Abecitrus explains: “There’s been a coffee industry for centuries in Brazil for centuries while the citrus industry only began in the 1960s. Secondly, we export mainly concentrated juice that is used, sold and branded by customers abroad with little reference to its origin.”

Americans and Europeans don’t know because FCOJ is usually sold under a brand name. Only by reading the ingredients of a can of FCOJ will you see the words: “Contains orange juice concentrate from the US and Brazil.” (Americans are clueless about Brazil in general, not just regarding Brazilian orange juice. I went on the campus of Washington & Lee University near our farm in Lexington, Virginia (three hours from Washington, DC, so we are not totally removed from reality) and asked a bunch of students to tell me three things they knew about Brazil. More or less the answers were: it’s a developing country, the slums are known as favelas and the music is called samba!)

Americans got a little information about the orange juice business through the movie comedy, starting Eddie Murphy, called Trading Places. In it, Murphy and Dan Akroyd use the FCOJ futures market to get even with a couple of nasty speculators.

I must admit I probably didn’t know much more when I started visiting Brazil for the first time. There were many processors when I arrived and Cutrale was a start up. Now José Cutrale is the owner of the world’s biggest citrus processing operation in Brazil and Florida, and probably the richest man in Brazil.

To put all of this in some context here are some numbers:

* Brazil is the world’s largest producer of oranges, with 27% of world production
* Brazil produces 53% of all orange juice consumed in the world
* One in two of FCOJ drunk in the world comes from Brazil, and one in four comes from the Brazilian company Cutrale
* The state of São Paulo is responsible for 98% of Brazil’s production; there the industry employs 400,000 people and has 10 processing plants and 19,000 groves
* Brazil now has 700,000 hectares of orange groves while Florida is down to 280,000
* Brazil now exports 1.2 million tons of frozen concentrate a year. How much is that? 60,000 truck loads!
* One firm, Cutrale, controls about 40% of Basil’s orange juice processing capability and has annual revenues of around US$1 billion.
* Cutrale, because it is the largest, is the most reviled. In Brazil it is criticized because it keeps prices low for the producers. In the US, where it owns plants, it generates complaints for keeping wages low.

The Blossom’s Beginnings

Throughout history the citrus fruit has been a symbol of love, happiness and holiness. The Japanese long felt the blossoms represents chastity while the Saracens thought it a symbol of fruitfulness.

Arab traders brought the fruit from China and India and helped speed it through the Mediterranean area. The Portuguese and Spanish introduced oranges to the new world. Reportedly Christopher Columbus brought oranges to the Caribbean. The Portuguese took the orange everywhere. When I worked in Iran I asked for orange juice when ordering breakfast. In Teheran; it is called “ab portughal,” Portuguese Water.

After Florida was ceded to the US from Spain, growing of oranges really took of. The orange became Florida’s symbol; even today Florida’s license plates have a picture of a couple of oranges. But then Florida’s preeminence began to wane.

Disneyworld is a metaphor for all the urbanization that is going on in Florida. Florida has 17 million permanent inhabitants and is growing. This is driving farmers out of all sorts of agribusinesses and driving up the price of land. In addition Florida is constantly hit by hurricanes and frost which destroy fruit trees. There was a great freeze in 1894-95 which drove the fruit growing further south in Florida and on into Brazil. The citrus growing areas of Brazil have few of the Florida’s problems.

The demand for oranges really got underway by a man named Anthony Rossi who founded a company called Tropicana. It was he who spear headed all sorts of advertising campaigns to get people to drink orange juice. Slogans like “A day without Florida orange juice is like a day with out sunshine.” If he hadn’t done that, Americans and Europeans might have become fixated on apple or cranberry juice.

A languishing icon of that era is the Florida Citrus Tower in Clermont, Florida, which just celebrated its 50th anniversary. The Orlando Sentinel newspaper has called it a “monument to a vanished industry.” The original purpose was for visitors to be able to see kilometers and kilometers of orange groves from the top of the 500-foot tower, but now all you can see are subdivisions and the tallest building of Disneyworld off in the distance.

Florida was king when the tower was built in 1956 and until frost, development, diseases, higher US wages and the growth of the industry in Brazil took hold.

Florida can’t compete with Brazilian juice on price so it has tried to prevent Brazilian citrus from coming into the US. The trade group representing Florida processors has been busy during the last 20 years to put duties on Brazilian juice. They claim that Brazil dumps its orange juice (sells at less than cost of production) and below fair market value since there is no market in Brazil for it. US juice producers are frustrated by the fact that picking and transporting oranges in Florida costs nearly four times as much as it does in Sao Paulo State.

Brazil’s Blossoms

Brazil has become the low cost producer of a number of commodities: soybeans, coffee, sugarcane and oranges.

First local entrepreneurs like Cutrale got involved in the business. Then came the Germans through the Fisher group. Then multinationals like Dreyfus and Cargill. These four now control 70% of the FCOJ market.

The US has been a major market for Brazil. Its market share grows when frosts or hurricanes diminish the Florida crop, which is in an irreversible decline, in any event, due to urbanization.

Competition spurs politics that keeps more Brazilian juice from entering the US. As one trader told me, “More Florida growers vote in US elections than do Brazilian growers.” As a result US consumers pay more for orange juice than they should but this is no different than protections erected to help the sugar and ethanol industries.

Cutrale realized all the problems in being just in Brazil so it expanded its operation into Florida. It could be in a better position to arbitrage. Arbitrage is the buying and selling of a good in two different markets to take advantage of difference in prices between the markets; it already happens in financial markets as well as soy and coffee.

Cutrale moved into Florida in a big way when Coca Cola agreed to buy a couple of FCOJ processing plants. Cutrale doesn’t have unions in Brazil and didn’t want them in Florida. The Teamsters, a powerful union, struck back. They handed out leaflets (see image) with the headline “Rats, Roaches and Recalls.” Cutrale operated the plants but the juice was sold under the Minute Maid name. Cutrale’s wages were 40% lower than with the Teamsters, which increased the attacks. Cargill also sold all its processing plants to Cutrale and another firm Citrosuco. Cargill decided it just wanted to trade and not get involved in the processing plants.

Fruit in the Future

Brazil is here to stay and Florida producers want to cooperate with Brazil to promote juice in other parts of the world even though they will work against Brazil gaining free access to the US market. But long term, Brazil will continue to gain market share as it doesn’t have hurricanes, high costs and Disneyworld to cope with. If I was the fellow who owns the citrus tower in Clermont, I would build a Brazilian version in Araraquara.

Books by John Freivalds on Amazon.com

Visit the website of John Freivalds’ company, JFA Marketing.

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