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Frozen Orange Juice Could Offer Solid Option Selling Plays This Month
By: James Cordier
Liberty Trading Group
June 24, 2004
Frozen Concentrate Orange Juice prices have suffered from a double whammy of increasing supply and decreasing demand that has resulted in a steady grind lower in prices for almost two years. Orange Juice prices are currently at their lowest levels since 1977. This has some in the trade starting to sense a value play in Juice. With the fundamental tide possibly starting to turn, we think they may have something.
Before we can discuss why juice may be a value at current levels, we must first understand what has taken Orange Juice prices to such enticing lows.
We can start with Brazil. Like in many other agricultural commodities, Brazil has become the global superpower of the orange industry. Besides being the #1 provider of Orange Juice to the US, Brazil now dominates the markets outside the US, making exports of US Juice virtually non-existent. In addition, if it were not for a surcharge slapped on Brazilian juice coming into the US, many feel that the US orange juice industry could be almost wiped out entirely by Brazil. Talk of the US government reducing or repealing this surcharge entirely has many Florida Citrus growers very nervous.
Large US supply has also dogged prices. Florida growers produced a record crop of 245 million boxes of oranges this year. This represents a 17 percent increase over the 02/03 crop and will yield about 1.5 billion gallons of orange juice. This new orange juice is coming into the supply pipeline at a time when storage supplies are already high.
Unlike California oranges which are used primarily as table fruit, Florida oranges are used almost exclusively for juice, accounting for 97% of all US orange juice production.
Possibly the most daunting development for OJ prices in the last 24 months has been the blow demand has taken since a man named Dr. Atkins named Orange Juice as a top enemy of weight watching carb counters. With popular low carb diets such as Atkins and South Beach advising followers to avoid carbohydrate-laden orange juice, annual per capita consumption has fallen from nearly six gallons in the late 1990's to below five gallons today.
This is why storage supplies increased last year even when harvest numbers were lower.
These are the factors that have brought juice to its current levels. However, with OJ prices still hovering near 27 year lows, the market may have finally done it's job of pricing in these fundamentals. Nothing cures low prices like low prices. And juice may have finally hit a price level that could be considered too low.
In addition to trading at historically cheap prices, some of the fundamentals that brought juice to these values may be turning back in OJ's favor. The Florida Department of Citrus has launched a counter-attack against low carbohydrate advocates in the form of a $7 million dollar advertising campaign touting the health benefits of Orange Juice. The industry itself has responded vigorously as well, rolling out several low carbohydrate, low calorie versions of their traditional product that promises to rejuvenate OJ sales in supermarkets nationwide.
Future harvests may begin to recede as well. A bacterium called citrus canker has led to the felling of 2.2 million trees in commercial orange groves in Florida. In addition, the ever fiercer competition for land and water in the state of Florida as a result of exploding population growth has caused land values to skyrocket. Many growers are being tempted to sell all or portions of their groves to developers willing to pay monumental prices for prime real estate.
As far as meddling with the surcharge on Brazilian juice, don't count on it, at least this year. Both candidates for the presidential election realize the importance of the I-4 corridor (the citrus belt) in regard to swaying the states electoral vote. It is unlikely either candidate would approve a mandate that would virtually decimate the Florida Citrus industry, but it is almost a certainty that Bush would not approve it in the months prior to the election.
Although these factors may not have an immediate impact in raising the price of FCOJ, we feel that orange juice may have achieved a long term low last month. Although there is always the possibility that these lows could be revisited in the coming months, we now believe that the path of least resistance is up, considering that the market appears to have priced in the worst of the fundamentals. In other words, when you're at the bottom, things can only get better and they now appear to be heading in that direction.
In addition, FCOJ prices may now begin to benefit from normal seasonal factors as well. As the Florida citrus season officially ends in June, much of the hedge pressure from commercials should begin to lift, easing the way for prices to rebound.
Orange Juice then, appears to be at a good value at current levels. We are recommending put sales beneath last month's lows as an excellent way to take advantage of these price levels. Put sellers can profit even if the market does not move higher. As long as prices remain above the strikes sold, the options will eventually expire worthless and the put seller will profit.
We will be working closely with clients in the coming weeks in selecting and selling option premium beneath the Orange Juice market.
If you would like more information about option selling in futures or establishing an account based on this approach to the market, please feel free to call.
James Cordier
Michael Gross
James Cordier is head trader and president of Liberty Trading Group, a registered CTA and futures brokerage firm specializing in option writing on commodities. James' market comments are published by several national financial publications and worldwide news services.