Amidst an indecisive series of tests conducted by the U.S. Food and Drug Administration (FDA), the outlook is incrementally turning vague for the orange juice industry.
The hullabaloo was first started by The Coca Cola Company (KO) after it reported to the watchdog that it had found some traces of fungicide, namely carbendazim, in its orange juice, made by the company itself and its competitors.
Carbendazim is a chemical fungicide used to combat a malady known as "black spot" in the oranges. It is legal in most parts of the world, including Canada, Japan, Europe and Brazil. The black spots do not affect the taste or the nutritional quality, but makes the fruits visibly less appealing to customers.
FDA geared up its team and immediately started conducting tests on samples from 31 shipments. The watchdog gave clean certification to three samples of juice that arrived from Canada. However, the results for 28 import samples from Brazil, Mexico and Canada were still pending.
The watchdog went forward and confirmed that "consumers can be confident that the orange juice in their refrigerators is safe," and US regulators last week allowed the entry of first shipments of imported orange juice in the country since January 4, 2012. The regulators had started testing for the fungicide around January 4.
Meanwhile, PepsiCo International (PEP), owner of Tropicana fruit juice, conducted tests on its fruit juice and followed Coca Cola in acknowledging that their fruit juice, Tropicana, contains a dangerous fungicide. However, the retail giant also assured that the level of fungicide present was lower than the safety level determined by the federal and the juice does not pose any health risk.
However, very recently on Friday, FDA said that orange juice samples from 11 shipments, which it had restricted from entering past the U.S. border, were tested positive. The regulator explained that orange juice in those shipments contained 10 parts per billion or more of carbendazim, which might cause health hazards, as the chemical can cause fatal diseases like liver tumor in human beings.
Pepsi reacted to the most recent findings by announcing that it will resume using oranges which are 100% imported from Florida. Tropicana Pure Premium sourced its oranges from Florida until crop problems arose in 2007, forcing the PepsiCo-owned brand to import shipments from Brazil. However, Kroger Co (KR), the biggest U.S. supermarket chain, said it was not recalling any orange juice from its shelves
The highly-volatile Orange Juice market, which is concentrated into some small areas, was quick to react to this development. Traders are now speculating a slowdown in the imports of orange juice from Brazil owing to the contamination. The prolonged inflated prices could also slash the sales volume of Coca-Cola and Pepsi. Moreover, news of emergence of a crop-destroying disease called "citrus greening" in Texas and colder weather in California also added to the threats of a supply shortage.
Brazil is the largest contributor of oranges that are required for the fruit juice market. In 2010, the South American country shipped over 171 million gallons of orange juice to the United States. However, Florida is the principal exporter of orange juice to the U.S.
FDA has delayed imports from foreign countries into U.S., until it completes its investigations. It is unclear as to how long FDA will take in completion of its investigations, or how long will the delay in imports continue. Market experts feel that a prolonged delay will raise the price of orange juice due to supply shortage in the country.
Worried by the bleak future of orange exports from their country, Brazilian farmers have appealed to the FDA that they should make their norms a little less stringent on testing for traces of the fungicide and also raise the safety level of carbendazim to 60 parts per billion in the orange juices.
While FDA has limited the safety level of carbendazim in fruit juices to 10 parts per billion, Environment Protective Agency (EPA) considers several thousand parts per billion to be a health risk.
Brazilian orange juice exporters are now busy finding substitutes for carbendazim. They have asked for a period of 18 months to phase out the transition. Exporters also claim that FDA is putting same standards on concentrated juices and diluted ones.
However, the authenticity of the tests conducted by the FDA has been questioned by several other pesticide controlling authorities. According to them, FDA is not very efficient in tracking chemical residues in food, as it often focuses testing on common food-borne pathogens such as Salmonella and E. coli.
Health experts, however, feel that the issue should be seriously considered, as carbendazim is a possible carcinogen and can disrupt human hormone systems even at low levels of exposure. It is also considered an aneugen, meaning it interferes with cell division and can cause mutations. Australia banned the substance for most uses in 2010. The World Health Organization has said risks are high only if large doses are ingested.
The FDA has said that its final results won't be released until Feb. 3. If any of the pending tests give positive results at 80 parts per billion or higher, the FDA has said it will "take steps for its removal from the market" but not issue any recalls.
Meanwhile, Brazil’s future has been kept hanging and is dependant wholly on the FDA verdict. Orange juice traders were apprehensive about as they feared the possibility of a potential ban by U.S. health regulators of Brazilian juice products using the fungicide.
It was fueled by a recent trimming of yield forecast for the orange crop in Florida by 2 percent after a dry spell hurt fruit size by the USDA following a dry spell which hurt fruit size. The mentioned macroeconomic factors sent orange juice prices to record territory this week.
Currently, we prefer to be Neutral on Pepsi and Coca Cola's stock. Furthermore, they hold a Zacks #4 Rank, which translates into a short-term Sell rating.
COCA COLA CO (KO): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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