Orange Juice Trading

The orange juice market changed overnight when the process for making frozen concentrated orange juice (FCOJ) was invented in Florida in 1947. Unlike most commodities, orange juice futures are a relatively modern form of a basic agricultural market. While most of the emphasis for the orange juice futures trader has been on Florida and its orange crop in the past, orange juice production in Brazil now has a strong influence on the FCOJ market.

Investing in the orange juice futures and options market provides critical risk management tools to an industry at extra risk when the weather changes rather suddenly and dramaticallly. Frozen Concentrated Orange Juice is especially sensitive to weather conditions in Florida and Brazil during the hurricane and winter seasons, with the threat every year that one severe hurricane or one big freeze could damage or wipe out years of growth and development of orange tree groves.

Trading orange juice or FCOJ futures isn’t really like the trading action depicted in the film, Trading Places, in the 1980s, but it is true that FCOJ futures trading can involve the exchange of a lot of money in a short period of time when weather conditions pose a potential threat to the orange groves in Florida. The impact of the status of the Florida crop on FCOJ prices may not be as great as it once was because of the expansion in the production and export of orange juice from Brazil, but FCOJ futures still rate as one of the more volatile commodities. Veteran traders often give a couple of pieces of advice:

• Never be short FCOJ futures going into January.
• Never be short coffee futures going into July.

That advice could extend into having call option protection going into those seasons and then, if there is a significant rally, put option protection as prices return to more normal levels if fear turns out to be greater than reality.

Some training in forecasting weather or having access to predictions from a good weather service might also be a good investment for the FCOJ trader, who not only needs to anticipate the extent of the effect of a weather development but also the degree that traders might have already worked the weather consequences into current orange juice futures prices.

Orange Juice Trading Information

Although a number of factors, such as a processing capacity, disease, and the strength of the U.S. dollar, all may affect the supply and pricing of orange juice, FCOJ is still widely regarded by traders as a true “weather” market. More than 98% of the U.S. orange juice supply traded on ICE comes from Florida, a geographic concentration that is unlike any other commodity and makes weather information from Florida critical to the FCOJ trader.

While frost and freezes and hurricanes may affect Florida production, dry weather and droughts may affect orange juice production in Brazil, which accounts for 80 percent of the world’s frozen orange juice concentrate export market, including exports to the United States. Because of the inverse growing seasons for the United States and Brazil, their combined production makes the FCOJ market a year-round market. The United States and Brazil outpace all others in orange juice production.

The volatility of FCOJ is what makes trading in this sector attractive to many. Orange juice futures can offer real price moves for the trader looking to cash in on short-term developments, especially those related to the weather in Florida. Orange juice prices will almost certainly soar as a result of U.S. hurricane warnings or impending cold winter. This sensitivity to weather factors combined with a competitive orange juice market makes the price of FCOJ extremely volatile. Because orange juice and FCOJ prices are highly correlated, FCOJ futures are an important risk-transfer tool for a citrus industry vulnerable to extreme price risk.

It can take as long as 15 years for an orange tree to reach maturity so any efforts to increase production require a long-term commitment, which can often be interrupted by the short-term developments. FCOJ traders placing stops outside of current trading ranges during the fall hurricane and winter freeze seasons may be able to catch these short-term moves.

Florida and Brazil outpace all other areas in orange juice production so FCOJ traders should concentrate on news from those two areas. One measure of Florida’s orange juice supply can be gleaned from the number and quality of citrus trees, a number published bi-annually by the Florida Agricultural Statistics Service, which breaks down trees by type and numbers producing fruit.

The National Agricultural Statistics Service, Economic Research Service and Foreign Agriculture Service of the U.S. Department of Agriculture all provide information about orange production, orange juice supply and demand and other details in the monthly crop production reports and updated supply/demand estimates as well as quarterly summaries of the crop situation. The orange crop production number in the Brazilian Association of Orange Juice Exporters (Abecitrus) is Brazil’s primary source for FCOJ news and statistics for the country. October report and updates in the November report are often noteworthy for their effect on orange juice prices for the coming season.