In a state of perfect competition, an equilibrium price will be set for the juice that matches the aggregate marginal cost. This is likely to decrease the production capacity of producers who are producing above this cost. The subsidy distorts this market to an extent, allowing more Florida producers to continue to remain in the business. Under natural market conditions, however, the amount of acreage under development in Florida would decrease as the result of Brazilian competition.
Another issue is the erosion of pricing power that the growers have experienced over the years. As the retail side of the industry has experienced consolidation, the buying power of retailers has increased significantly. This has the effect of transferring most of the risk of orange juice price fluctuation to the producer, whereas through much of the 20th century this risk was offloaded onto the consumer. The FDOC had worked to hedge against this risk through the use of price...
Prior to the 1990s, prices in the industry were largely driven by fluctuations in supply that resulted from weather-related market entry and exit. With Brazil operating out of the Florida weather cycle, overcapacity has become a chronic issue, working to suppress prices permanently. This again indicates that Florida may need to shed some capacity in order to boost prices.
Florida's citrus producers need to determine the best course of action given the changes in the industry, the competitive and political environments and the economic consequences thereof. There are a number of options ranging from maintenance of the tariff in the face of increasing pressure; lowering capacity in the industry; developing new markets for FCOJ or building out the market for NFC.
