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Brazil orange juice giants squeeze small farmers

2010-11-23 16:32:36 GMT (Reuters)

* Orange farmers say cartel driving them out of business

* Two of only four firms, Citrovita, Citrosuco plan merger

* Industry says competition, not cartel, hits small grower

By Peter Murphy

BRASILIA, Nov 23 (Reuters) - After 40 years of growing citrus in Bebedouro, a town nicknamed Brazil's orange capital, farmer Laerte de Souza Barbaro last year pulled out his 80,000 trees and replanted his entire 200 hectares with sugar cane.

Thousands of other farmers have done the same. Bogged down in debt, toiling to produce about half the world's concentrated orange juice, farmers in Brazil allege a juice industry cartel has been driving down prices and driving them out of business.

"I've left it now thank God. I should have gotten out of it a long time ago," Barbaro said. The biggest customers in Brazil's $2 billion juice industry include the Coca-Cola Co's Minute Maid brand and PepsiCo Inc's Tropicana.

Plans to merge by Citrosuco and Citrovita, two of the four remaining local juice firms, would leave 80 percent of the world's global concentrated orange juice supply in the hands of three companies. Brazil's growers fear this could squeeze them further still.

"There used to be dozens of (juice processors). The orange growers have little choice about whom they sell their produce to and that's where the problem starts," said Marcos Conforto, a lawyer representing the aggrieved growers.

Associtrus, the orange producers' representative, estimates more than 20,000 farmers have abandoned citrus due to lack of profit. The industry, which crushes the fruit and concentrates the juice, has been boosting its own production.

Four companies dominate the $2 billion industry: family-owned Cutrale, the largest; Votorantim's Citrovita, Fischer Group's Citrosuco and France's Louis Dreyfus Citrus.

Citrovita and Citrosuco announced in May they would merge, a deal that needs the approval of competition regulator Cade.

The same authority will judge a criminal investigation into alleged price-fixing through an industry cartel. The outcome could deter regulators from approving the merger if they find evidence of collusion beforehand.

The industry denies that a cartel or price fixing exist.

"We're saying there is no cartel. It's easy to go saying there is since it's a sector with just a few companies, just four," said Carlos Viacava, corporate director of Cutrale, the world's single largest orange juice producer.

He said a more varied, competitive beverage market needed more efficiency to survive, something only farmers with large plantations could achieve, and it was this streamlining that was squeezing out the small grower.

"There is fierce competition between the (four) firms," Viacava told Reuters, adding the activity was still lucrative for larger, more efficient growers.

The industry exports about 1.3 million tonnes of frozen concentrated orange juice, FCOJ, per year for a variable revenue of around $2 billion. Europe buys around 80 percent of Brazil's FCOJ exports.

The industry last month presented an elaborate study, "A Snapshot of Brazilian Citrus" produced by a group of academics from the University of Sao Paulo. The study details industry costs, export prices and prices paid at the farm gate.

It showed that farms with more than 400,000 trees now accounted for nearly 40 percent of total trees in the orange belt in 2009, versus only 16 percent in 2001. The number of producers with fewer than 50,000 trees was declining. (Graphic: http://r.reuters.com/kum66q )

The efficiency drive is not making orange juice any cheaper but the industry says the shift to larger plantations has helped keep costs in check and prevented orange juice from pricing itself out of the market.

"It's a question of survival. The industry faces a big challenge making its production costs lower. It's an existential dilemma," said Christian Lohbauer, spokesman for CitrusBR, the association representing the companies.

PRODUCERS PEELED?

Growers, whose cause is led by their representative association, Associtrus, point to accounts by two former industry executives who came forward and admitted to taking part in secret meetings between companies to rig the market.

The cartel "brought about a rapid decline. The damage it did was much worse than we expected. If it continues like this there will be no future for orange (in Brazil)," said Paulo Ricardo, a former orange buyer for Louis Dreyfus Citrus.

Ricardo will benefit from a leniency clause afforded by the justice system to the first industry witness to come forward.

He said the companies divided the vast orchards in the main orange state, Sao Paulo, into exclusive buying zones, with harsh penalties for buyers who crossed into other zones.

Another witness, Dino Tofini, former head of long-defunct CTM-Citrus, described in a Brazilian newspaper this year how any company that broke the cartel pact would be punished by the others who would pay "absurd" prices to outbid them for fruit.

Associtrus showed Reuters a copy of a contract dated 1995, allegedly drawn up by the larger number of existing juice producers at the time, which detailed the allotment of fixed market shares to each.

"The means and the purchase price of fruit must be established ... Participants must operate rigorously at the fixed ceiling price," stipulate two of the contract's "buying rules". Cutrale's Viacava said he had no knowledge of it.

In 2006, the authorities conducted raids on the orange juice companies' offices, branded "Operation Fanta." They seized batches of documents that are only now being scrutinized after the companies failed in legal moves seeking to prevent them from being opened.

The cartel allegations date back about 15 years, when the industry was put under surveillance for a period before being deemed to be operating regularly. But growers insisted that the companies were in cahoots, and filed a complaint in 1999 which has yet to reach the judges.

Led by Associtrus, growers plan to seek compensation for income lost because of the alleged cartel, which they say has cost them billions over the years. They say it has survived this long due to its political and economic sway.

OR SQUEEZED OUT?

The industry, for years secretive and publicity shy, has been hitting back at the allegations and seeking to improve its image through establishment of industry association CitrusBR.

CitrusBR spokesman, Christian Lohbauer, dismisses the accusations against the industry as "a huge amount of lies".

"When you ask the other side to put their numbers on the table, they don't have any," Lohbauer said, referring to any price data that could prove the existence of a cartel.

He pointed to the newly published study on the sector, financed by the four firms, which showed that when export rates were around $2,000 a tonne, it left $6.11, or about 10 reais, to cover the main costs of both the growers and the industry.

Industry data showed that producing a 40.8 kg box of oranges on large plantations, cost 7.26 reais in 2009, excluding harvest and transport costs. But growers' association Associtrus put the cost at 15.70 reais for a 100 hectare farm.

Prices are much higher this year and rates the industry is paying to growers have risen correspondingly.

Lohbauer said juice companies were buying spot market fruit now at next to no margin to compete and this year they were sometimes exporting at a loss.

"If we had a cartel would we pay 3.50 reais in 2009 and 15 reais in 2010? ... We would pay 3.50 reais every year," Lohbauer said.

Spot prices were sometimes higher last year at up to 7 reais or so.

Average prices have roughly doubled this year in Brazil, as they have in Florida, where producer-industry relations are much more harmonious and where three of the four Brazilian companies operate, with the exception of Citrovita.

A graph in the study comparing New York FCOJ prices with Brazilian per-box farm gate prices shows relative cohesion in their direction of movement but more so in the last five years. (Graphic: http://r.reuters.com/jum66q )

For years, Associtrus has sought a grower-industry committee to set prices on a consensual basis, as a solution to the dispute. After ignoring the idea for years, the industry recently became keen to establish it as quickly as possible.

"We think they want to use it to end the investigation and get approval for the Citrovita-Citrosuco merger," said the head of Associtrus, Flavio Viegas.

Associtrus has rejected the methodology the industry proposes to set prices, saying it lacks transparency. The industry says if it can't bring Associtrus on board, it will form the committee with other groups it says are willing.

But even where big buyers are absent, growers still complain about low prices -- even at a farmer-owned cooperative that juices its own members' fruit for export from Parana state, next to Sao Paulo.

"We don't pay Sao Paulo's price and we don't have their efficiency. (Our price) is lower," said Peter Elshof, buyer at Cocamar where not some but all of the profits go to the grower.

Cocamar has survived alongside the giants because Parana's oranges are banned from Sao Paulo to stop disease spreading but its smaller growers appear to face the same prospects.

"We can't find farmers interested in growing anymore because it is not profitable at the moment," Elshof said.


(Editing by David Gregorio)

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