Orange Juice Derivatives

June 03, 2008

 

 

NYBOT Orange Juice - Weekly Price Chart

 

 

Source: TFC Commodity Charts

 

Although the market may be year-round with predictable seasonal volatility, it is still quite close to a pure "weather" play. Volatility is usually lowest in April through June, with peaks during both the freeze and hurricane seasons in winter and fall. And while the hurricane season officially starts on June 1, hurricanes do not usually develop until around August and September when ocean temperatures have risen sufficiently.

As a "weather" play, in the face of a perceived weather threat, prices will usually go up a couple of days before the threat is expected to materialize. They will then fall rapidly either if it appears there'll be little damage, or if the threat does not actually materialize.

Opportunities In FCOJ

The stage is well-set for this year's orange season. The freeze and frost season is now over in Florida. Meanwhile, the USDA, in its April report on orange juice, reported that "Brazil's orange juice production is forecast to be down, which may aid in increasing demand for U.S. orange juice." With prices rising over the past month, straight investment in FCOJ futures could, at the moment, provide an interesting investment opportunity. A U.S. dollar weakening further against the euro could also add to this interest.

For those whose métier is technical trading, fall and winter may provide some especially interesting opportunities. These are seasons when both open interest is higher and trading volume increased. Stochastics, relative strength indices, Bollinger bands and moving average convergence-divergence may all be useful tools for measuring this market.

An accompanying understanding of the fundamentals of the FCOJ market should not, however, be dismissed lightly. As has already been noted, FCOJ futures are very much a "weather" play, so weather forecasts are of particular importance when trading FCOJ. And, if you remember the film Trading Places, starring Dan Aykroyd and Eddie Murphie, so, too, by extension, are crop reports. At this time of year, the USDA reports (one of which is quoted above) come out on a monthly basis. The next is due June 9.

Apart from both weather and domestic production forecasts, the following factors can, also, affect the price of FCOJ: levels of foreign production of FCOJ; reports of potential disease damage to fruit and trees, for example, Citrus Canker, CVC, Sudden Death Disease and Greening; the cost of imports (figures for which are available, for example, from Florida's Department of Citrus) - particularly from Brazil; the strength of the U.S. dollar; processing capacity; and, the availability of good orange pickers.

For those whose métier is not this type of trading, it may well be worth looking at FCOJ futures as exposure to the orange juice businesses of such U.S. companies as Coca-Cola (Bloomberg Ticker-KO:US) and PepsiCo (Bloomberg Ticker-PEP:US). The former owns Minute Maid and the latter owns Tropicana. All the indications are there that both these juice brands are becoming increasingly important for their parents.

Finally, and from much farther "out there," with the introduction by the CME in February of last year of both hurricane futures and options on such futures contracts, a consideration of the relationship, if any, between the price movements of these futures and those of FCOJ could turn out to be very interesting. At the same time, if such a notion is appealing, it should not be forgotten that weather risk contracts are already available in the OTC market.

Conclusion

For those who want to trade a commodity, either technically or on fundamentals, FCOJ futures, with their volatility, are certainly attractive. For those interested in FCOJ as a diversifying commodity, but not in trading it, the possibilities are, perhaps, currently somewhat limited. If nothing else, there are, as yet, neither FCOJ ETFs, nor ETNs. However, if, and when, CME hurricane derivatives prove themselves, there could well be some spread opportunities.

In the meantime, though, probably the most pleasant, healthiest and safest way to enjoy orange juice derivatives is in a glass!

 


1. Special thanks to Bob Norberg, Deputy Executive Director, Research and Operations, Department of Citrus, State of Florida, for his help.

2. The percent of weight of soluble solids (sugars and acids) in a solution measured at sea level at 20 degrees Celsius. The Brix scale determines the percent by weight of soluble solids, with the present minimum of 42-degree Brix indicating that 100 pounds of concentrated juice would contain 42 pounds of soluble solids at a specific temperature.

 


Resources:

Chicago Mercantile Exchange

IntercontinentalExchange

Florida Department of Citrus

Florida Office of USDA's NASS

USDA's FAS

ABECitrus

UNCTAD

Orange Juice and Weather, Richard Roll, The American Economic Review, Vol. 74, No. 5, (Dec., 1984), pp. 861-880

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