Orange Juice Derivatives Look Sweet

Since we've already looked at pulp for making paper, it's back to orange juice. Oranges prove to be nearly entirely usable fruits. Little of an orange needs go to waste.

When the juice has been extracted from a juicing orange - which accounts for about 50% of its weight - you are left with peel, pulp and seeds. While some of the remaining pulp may be added back in for those "Loads o' Pulp" cartons of juice, together with the peel and seeds, the pulp actually makes healthy feed for cattle. The oil found in the peel (in the flavedo and albedo parts of the orange) can be extracted as citrus essential oil and used to make both flavors and perfume. All in all, a productive piece of produce.

When oranges are juiced on a commercial basis, the resulting liquid is made into either chilled juice or frozen concentrated orange juice [FCOJ]. In Florida, where the vast majority of America's juicing oranges are grown, 49.1 million boxes of oranges were turned into FJOC in 2005-2006 alone, and some 90.2 million boxes were turned into chilled juice. (Note: A box, equivalent to 90 pounds of oranges, is a 1-3/5 bushel, 2-compartment, open-top wooden container used in the field to hold citrus fruits during harvesting operations).

Although there are no chilled orange juice derivatives, there are futures and options on futures contracts for FCOJ. These are traded on the NYBOT (now a wholly owned subsidiary of IntercontinentalExchange [ICE]).

Some Orange Facts

Florida is the U.S. home of orange juice.

The first orange trees in Florida were planted (probably by the Spanish explorer Ponce de Leon) around St. Augustine in the mid-1500s, and citrus has been cultivated commercially in the state since the mid-1800s.

Florida now has more than 80 million citrus trees (grapefruit, oranges and specialty fruit, e.g., tangerines), planted in 575,000 acres of citrus groves. Each can take up to 15 years to reach maturity. The industry employs some 80,000 Floridians and is a $9 billion industry. While production peaked in the early 2000s, it has dropped off dramatically since the hurricanes of 2004 and 2005.[1]

The fresh orange season in Florida is from October through June; grapefruit from September through June. The season for a number of specialty fruits lasts from October through April.

In contrast with the apple juice consumed in the U.S., most of which is imported from China (see China: A Growing Player In Fruit And Vegetables), America's orange juice is made from over 75% Florida oranges. And of Florida's citrus production itself, around 90% is turned into canned, chilled or frozen concentrated juices. America's fresh oranges for eating are predominantly grown in California, with a very small proportion grown also in Texas and Arizona.

This year's latest Florida all-orange forecast (dated May 9) from the United States Department of Agriculture [USDA] Agricultural Statistics Board anticipates a production level of 168.5 million boxes.

According to the USDA: "If achieved, this forecast will be the most produced since the 242.0 million boxes in 2003-4, prior to the two hurricane seasons." In addition, the USDA all-orange
projection of FCOJ will surpass last season's record.

On a global basis, after Brazil, Florida is the world's second-largest producer of orange juice. And, since Brazil produces when the U.S doesn't, and vice versa, together they constitute a year-round market.

Source: Foreign Agricultural Service, Official USDA Estimates

One metric ton of 65 degrees brix[2] equals 344.8 gallons at 42 degrees brix and 1,405.88 gallons at single strength equivalent for 2006/2007 and earlier. For 2007/08 one metric ton of 65 degrees brix equals 344.8 gallons at 42 degrees brix and 1,392.6 gallons at single strength equivalent.

However, while the U.S. drinks, imports and exports orange juice, Brazil drinks very little of its own juice and exports the rest. It imports no orange juice. Brazil is both a big exporter to Europe and a primary juice supplier to China.

Source: Foreign Agricultural Service, Official USDA Estimates

Of the 905,000 metric tons of orange juice consumed domestically in the U.S. in the marketing year 2007-8, over 30% (273,000 metric tons) was imported.

Source: Foreign Agricultural Service, Official USDA Estimates

Why FCOJ?

FCOJ only truly arrived commercially in the mid- to late-'40s, revolutionizing the world of orange juice. The catalyst was a patent issued to Florida researchers for the process to manufacture FCOJ with the addition of around 10% fresh juice to the final product.

Source: University of Florida - Florida Cooperative Extension Service

FCOJ's popularity lies not only in its having a relatively good juice flavor, but also in its ease and convenience, when contrasted to hand-squeezing. As important, FCOJ can stay frozen until needed and is easily transported.

As with any agricultural commodity, weather is the main factor in determining the price of FCOJ. Frosts, freezes (a drop in temperatures below 28˚F for four hours or more will damage Florida oranges) and hurricanes in Florida, and droughts and dry weather in Brazil all have a significant bearing on FCOJ production and price.

FCOJ Futures

FCOJ futures were launched on the NYBOT in 1966, with options on such futures following in 1985. The standard FCOJ contract is for 15,000 lbs of orange solids (3% more or less) with settlement by physical delivery in either tanks or drums.

Although not extraordinarily great, there is depth to orange juice futures. This year (to May 9), the NYBOT has recorded a total volume of 251,179 futures contracts traded, an average daily total volume of 2,955. Figures for options on futures were 92,480 and 1,088, respectively.

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!

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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

Comments

[Nate C:]

Quality article. Thanks for posting it.

2008 Jun 09 11:58 PM