U.S. citrus group Limoneira Company (NASDAQ: LMNR) has a "couple of arrows in the capital quiver", according to CEO Harold Edwards, as Wall Street continues to respond well to positive lemon market fundamentals and the company's investment choices.

Limoneira CEO Harold Edwards

Speaking with www.freshfruitportal.com during the Produce Marketing Association (PMA) Fresh Summit last month, Edwards said the company's supply prospects would be bolstered by investments in Arizona and Chile this year.

"Lemons have been an amazing story, and it starts back in July last year when massive freezes started in the Southern Cone [Argentina and Chile]. That was the beginning of stunting supply, before going into the freezes in November and December in California and Arizona, which further restricted supply," he said.

"Limoneira had always done pretty well in figuring out where to grow lemons so that in the event of these big freezes, we usually would emerge with a little bit of fruit or a little less in trouble than other growers.

"We've also been able to fight frost and freezes with water in these situations."

He said the weather led to much higher pricing than expected in lemon markets as the company's production came on-line in August.

"Then when that California-Arizona freeze hit, it went even higher," he said.

"There are eight different sizes and three different grades of lemons, and we averaged the return for the 40-pound box across those sizes with a goal for the year of US$18. We're going to come in for the year at about US$27 - way above what we thought.

"It started out as a result of supply restriction, but as new supplies have come in and we’re basically back to normal, what happened that was beyond belief for us is we think we experienced - not only in the United States but globally - somewhere between a 10-15% increase in demand in consumption."

He added that this spike followed decades of flat consumption for the acidic fruit in the United States.

"The world began to eat more and more lemons as there was more modernization around the world, but because of that huge demand increase we’re now coming back into full production and pricing is still right up. It's unreal," he said.

He said the demand rise was partly supported by new uses for the fruit in cleaning, beauty and health products, along with positive messages for the health benefits of lemons in China.

"It's about how do you use lemons in your household for the smell or just to keep the house clean, as an alternative to a chemical-based cleaner? I think that had a lot of impact.

"When we were at Asia Fruit Logistica it was really amazing, we uncovered more demand for lemons than we could believe. Another thing we discovered is that certain parts of Chinese culture were into holistic healing and medicine, natural-based medicines, and concluded that one of the best ways to fight cancer in your body is to target the pH balance in your body.

"The way we live our lives today, most of our bodies are out of balance and need greater acidity to bring them back into balance, and they’ve landed on yellow lemons for whatever reasons as the best way to bring that back into balance. Anybody who’s paying attention to that in China is buying lemons."

Edwards had no doubt that lemon prices would go down from their highs, but believed a new floor would likely be at around US$22 per box rather than US$18 per box.

When asked whether some of the initial price hike could have come from higher lime prices, he said that in the beginning that probably was partly the case.

"Most of the U.S.’s limes come out of Mexico, around Veracruz and that area, and there was a hurricane followed by another hurricane, followed by really cold weather, followed by really hot weather. It had a huge impact on the crop," he said.

"What's interesting is that a lime tree flowers and fruits every 90 days, so as quickly as it’s a problem, it solves itself.

"A normal box of limes sells for about US$12-15 a box. It went up to US$100, even US$120 in some cases, and right back down to US$15 in three months."

Outlook

In the absence of any further acqusitions, Edwards expected growth of 500,000 cartons of lemons coming from California and Arizona for 2014-15, taking the U.S. total to 3.5 million MT, as well as an extra 100,000 cartons from Chile. This is still well short of Limoneira's ultimate goal of producing 10 million cartons of lemons a year, including five million cartons from Southern Hemisphere sources.

"The other thing which is really interesting in the Chilean opportunity is that Chileans consume 60-70% of the lemons they produce; we didn't want to make  big investments in poor markets that were totally dependent on export markets that would be one year in, one year out, given the fruit flow from other parts of the world," he said.

"This gives us a great opportunity to balance that; if the export markets are in then boom, we go. If they aren't there, no problem, we'll just keep it in Chile and sell there.

"Chileans eat roughly two times the amount of lemons per capita than we do here in the United States."

Another interesting aspect of Limoneira's citrus business is that as it expands its lemon acreage, it's been picking up a string of orange orchards along the way.

"Today we produce about a million cartons of oranges, which is relatively small in the whole scheme of things, but probably the number one question we get asked from our customers is, 'can I buy your oranges?'

"Right now we market all our oranges with Sunkist and with Sun Pacific. So we say no, but we're paying attention.

"We really think that to be relevant in the orange space we have to be somewhere between 3-4 million cartons, and that would need to be done acquisitively so we're looking at opportunities also in the orange space that could balance lemon supply with orange supply."

From a strategic standpoint, Edwards also felt the orange business could be leveraged to get more lemons into retail, in a bid to adjust the current share of 70% going into foodservice.

"And you can leverage your lemons to bring your oranges into foodservice, and that creates a really good opportunity to move your whole crop," he said.

When asked why the company was interested in oranges when many big citrus growers were pulling out of the larger fruit in favor of easy peeler mandarins and clementines, Edwards said his company would be staying well clear of the latter.

"We're not going that way because we didn’t want to go and duke it out with two of the biggest players in the industry who dominate.

"We always joke that when Paramount and Stewart Resnick built that new packinghouse in Delano, the investment for just the packinghouse was more than the entire market cap of our company."

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