When is it Most Advantageous to Trade Orange Juice Futures?

I wrote about trading coffee and bacon in previous articles. Keeping with the trading your breakfast theme, and several recent market developments, Orange Juice is the topic of this piece. This article will briefly describe the essential facts about Orange Juice trading, talk about several recent happenings in the market, and provide a basic technical overview of the commodity.

Orange Juice futures are traded on the ICE exchange with the underlying form of commodity being frozen orange juice concentrate, aka FCOJ-A.

“Not from concentrate” or NFC futures were available on the ICE until they were delisted in December 2007. The ticker symbol is OJ and the listing months are January, March, May, July, September, and November with no less than two January contracts always listed.

The contract size is 15,000 pounds of frozen concentrate from the countries of United States, Brazil, Mexico and Costa Rica. Specifically, USA and Brazil sources only through May 2009, Mexico and Costa Rica come into the mix from July 2009 forward. It’s based on physical delivery and needs to be an exchange grade product.

This means that the US Department of Agriculture needs to give its stamp of approval. The minimum tick size is 5/100th of a cent per pound or $7.50/contract. The exchange imposes a daily price boundary of $0.10 which expands to $0.20 on the trading day after the lead month settles either limit up or limit down. Lead month is the contract month with the highest open interest.

Orange Juice is a considered a true weather market. Production and supply are tied very tightly with the weather in the growing region. 98% of the US orange crop is from Florida, this geographic concentration of producers can create extreme havoc in the market in the event of extreme or unusual weather patterns.

Orange Juice traders study weather patterns religiously. Yesterday, June 19th, prices fell the most in a month since a weather report indicated no foreseeable weather threats to Florida. In fact, the perfect growing weather in FLA this year has inventories up 34% from last year and the future price has declined 23% so far this year.

Barring any surprises, fundamentalist traders would say OJ is a text book short right now. The dollar’s rally also affects OJ and other commodities. Bloomberg quoted James Cordier of Optionsellers.com as stating, “Orange Juice is getting sucked down on the dollar’s rally”

Technically, I would consider OJ to be in a meandering downtrend on the daily timeframe and a strong downtrend on the weekly. OJ is the second lightest volume commodity of the “softs” on the ICE so its more suited for swing or longer term time frames. The technical trending picture, combined with the fundamental outlook would have most traders looking to enter short on this year’s OJ contracts.

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.