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A Fresh Squeeze on Orange Juice

 

I believe that the growing supply and demand disparity could mean big rewards for Orange Juice traders down the line. There are a number of reasons and (in my opinion) tons of information to support my theory, but in this article I have broken it down to simple math.

For those not familiar with Futures, Options on Futures, or Commodities allow me to share the following information on Frozen Concentrated Orange Juice or FCOJ contracts before we continue. The following is courtesy of BarCharts.com and the CBOT Resource Center.

Contract Specifications:

  • Symbol - OJ
  • Name - Orange Juice (FCOJ-A)
  • Exchange - ICE FUTURES US
  • Trading Months - F,H,K,N,U,X
  • Trading Unit - 15,000 lbs
  • Tick Size - 0.05 cent per lb. ($7.50 per contract)
  • Daily Limit - 5 cents per lb. ($750 per contract)
  • Trading Hours - 8:00a.m. - 2:00p.m. EST
  • Last Trading Day - 15th last business day of the expiry month
  • Value of one futures unit - $150
  • Value of one options unit - $150

 

Let’s look at a real world example to better understand what we just read. For our example we will examine FCOJ for September delivery (aka the September contract). The expiration date for this contract is August 21, 2009. The contract size is 15,000 pounds per contract, which means that every dollar the FCOJ market moves, you could potentially make or lose $15,000.

However, Orange Juice does not typically move in dollar swings. Instead it more commonly moves in cents and fractions of cents. The value of each full cent is $150. September OJ has a current market price of 97.35 cents per pound. That means that with any given Futures contract or Option on the Futures contract, you would control roughly $14,600 in Orange Juice. Cool, huh?

Now that we know the basics, let’s take a look at the news surrounding this year’s harvest. The following information is taken from www.flcitrusmutual.com

 

Two private, well-respected analysts using complicated mathematical formulas and sampling techniques reached two very different conclusions. Kissimmee-based Citrus Consulting International put the orange harvest at 123 million boxes, a number the state hasn't fallen to since the freak freezes two decades ago. Winter Garden-based Louis Dreyfus Citrus put the figure at 160 million boxes of oranges, each of which weighs 90 pounds. 

 

Both are well short of the 220 million-box average Florida put out before the hurricanes whipped through in 2004 and 2005, but the high end would still better last season's 150 million-box haul in July.

 

The Intercontinental Exchange (NYSE:ICE) FCOJ futures contract trades in pounds of what they call solids. We’ve already established that each contract is equal to 15,000 pounds which is considered 15,000 pounds of solids. There are approximately 6 to 6.5 pounds of solids per 90 pound box of oranges. Therefore, one contract is approximately equal 2,300 to 2,500 boxes. Are you still with me? Good.

So, using these calculations we can determine that based on the estimates above, we will be short the equivalent of 24,000 contracts of Frozen Concentrated Orange Juice from this year’s crop.

Using the current market value for the September contract, that means the market will be short $350,460,000 worth of Frozen Concentrated Orange Juice. Do you think that would have an impact on the market price of Orange Juice? I do.

While I am certain that some of this information has already been factored into the current and future market prices (contango), I believe there is still more upside to be realized. Furthermore, there are other factors looming that could spell additional bullish bias for Orange Juice. Consider economic factors like probable inflation later in the year, or diseases such as Citrus Canker and Citrus Greening that are wreaking havoc on orange groves in Brazil, California, and Florida. Then of course we have to consider Hurricane Season which begins on June 1st.

With these factors in mind, it is easy to see why many traders, including myself are bullish on Orange Juice.