The Frozen Concentrated Orange Juice (FCOJ) futures have been trading sideways for since last winter’s Polar Vortex spooked the market. What we’ve seen since has simply been a range bound, unexciting market to which, I say, “Thank you!” Trading for a living isn’t about excitement. It’s about making an easy living in the toughest way possible. Therefore, when a trade sets up with our methodology in a low volatility environment, I can be reasonably sure that even if I’m wrong, it will be manageable. Today’s orange juice trade combines our Commitment of Traders (COT) Buy signal along with some late winter seasonal analysis from Moore Research.
Monday once again started our week off with a bang in our feature for TraderPlanet. We looked at the technical, fundamental and geopolitical support the 10-yr Treasury Notes were nearing and indicated that a buying opportunity was upon us in, “Commercial Traders Support the 10yr Treasury Note.”
Orange juice futures sold off this summer as is normal during the primary growing season. Fundamental analysis in this market by the commercial traders via the weekly Commitment of Traders report clearly shows that long hedgers are locking in future input prices as they believe that OJ is a buy under the $1.45 area. You can see their excitement kick in once the market fell below $1.45 in mid-June.
We went into more detail including orange juice futures seasonal and expiration analysis in our piece for Equities.com.
The orange juice market has rallied by more than 16% since June 25th and is now trading near $1.45 per pound. This marks nearly a complete recovery in prices from the sell off that was triggered by the late June, Department of Agriculture’s Cold Storage Report, which showed a 2% increase in inventories. Much of the rally that had led to the $1.55 high in May was due to speculative buying based on reports of, “citrus greening.” Citrus greening has been found in all of Florida’s main growing regions and leads to smaller oranges and less juice. However, Florida’s expected decline in production will be more than offset by other global issues, which will continue to pressure the market lower from these levels.
Global orange juice demand has been declining rapidly since the European economy began to collapse. The truth of the matter is that orange juice is a luxury good. Orange juice demand actually peaked way back in 1998 with global per capita consumption at 5.87 gallons per year. This amounted to a total supply of 1.8 million gallons or, 250 million boxes of raw oranges. The downward trend in demand has been tediously steady with 2008 providing the only uptick in demand over the last 15 years. Current consumption estimates stand at 3.85 gallons per capita or, less than 75 million boxes of total production.
The effect of the global decline in world orange juice consumption has taken its toll on the world’s largest exporter, Brazil. They are responsible for about 80% of the total world output. Their effort to gain market share from the U.S. over the last decade has led to a gross imbalance in the current marketplace. This has led to an about face in their agricultural strategy as the Brazilian government is expected to cull as much as 9% of total orange juice acres and redirect their efforts towards sugar cane which has a higher profit margin.
The macro trend of declining orange juice production is not lost within the commercial traders in the marketplace. Throughout the 1990’s and even into early 2000’s commercial traders were using the orange juice futures market to guarantee their supply. This means that commercial traders were generally net long and end line producers converting raw oranges into finished products were more concerned about high prices than they were about low prices. Therefore, spikes in commercial buying frequently led to long positions between 8,000 and 12,000 contracts. Most of these commercial buying splurges were followed by gains of more than 10% in the futures market, which shows that their actions have merit within the orange juice pricing structure.The last time commercial traders owned more than 12,000 contracts was in June of 2008. Keep in mind that this was the drought year and all agricultural commodities soared. Perhaps, the penultimate accumulation of more than 12,000 contracts is more instructive from June of 2004. This is when orange juice traded down to a multi year low of $.55 per pound. Currently, the commercial position is net long a mere 1,300 contracts. This tells me that end line producers have no fear of citrus greening affecting the overall marketplace. Furthermore, this tells me that they’re not worried about locking in future production at these prices.
The macro factors we’ve discussed lead us back to the current market rally, which I believe will act as a dead cat bounce. Therefore, we intend to sell the September orange juice futures contract upon the first sign of a reversal to head lower. The current rally appears to be overdone and we expect it to culminate in a momentum divergence that will cue our first entry. This short trade also coincides with the midsummer trough before fears of late summer hurricanes and early winter frosts cause orange juice futures to begin to bottom. As always, we will be protecting our position with stop loss orders placed just above whatever the high ends up being. After all, whether we’re right or wrong isn’t as important as capital preservation. Meanwhile, continually seeking out low risk, high reward trading opportunities will take care of capital appreciation.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.
Today’s price action appears to have trumped the
deflation/reflation argument that has been building over the last month. Many
of the markets have been rallying on small speculative buying as seen in the portfolio
rebalancing by the major long only funds.
Looking at the Commitment of Traders reports over the last
few weeks, we can see an increase in the net long positions of small
speculators in the following markets:
Swiss Franc, Japanese Yen, Canadian Dollar, Unleaded Gas,
Wheat, Beans, Bean Oil and Meal, Corn, 10yr. Notes, Eurodollars, Live Cattle,
Hogs, Copper, Orange Juice, Coffee, Sugar and Dow Jones futures.
The commercial hedgers have gladly stepped in to take the
short side of these trades with their numbers building as we’ve neared the
October – November resistance in many of these markets. Obviously, the interest
rate sector is the exception, although, there is strong short hedging taking
place at these levels.
There are a few major reasons for the resistance at these
levels. First, the U.S. Dollar Index has a strong bias towards setting a high
or low for the coming year in the first two weeks of January. If the Dollar’s
trend is going to be higher, the global demand for American commodities will
decline. Secondly, portfolio rebalancing by the major index funds for 2009 is
going to balance smaller gold weighting against heavier crude oil weighting.
Today’s collapse in crude oil futures is an indication that they may have filled their
need for crude. This also helps explain Gold’s inability to rally through $900
even on weak U.S. Dollar days. Lastly, the economic numbers continue to get
worse with each release. Last week’s ISM numbers were the worst since 1980.
Unemployment this Friday should continue to rise and eventually head north of
This is a very brief outline of the weakness I’m expecting
in many markets in the near term. Please call with any questions.
The past week’s action has seen a large decline in many of
the commodity markets. We’ve seen declines in oil, platinum, copper, corn,
wheat, sugar, OJ and others. Therefore, one has to ask, “What is the
justification for such a broad based selloff?” The answer, in short form, can
be found in the Commitment of Traders report. I track the commercials and large
and small speculators every week. However, Steve Briese, author of Commodity
Trading Bible, also tracks the Commodity Index Traders. This group makes up
the long only index funds that have been at the center of the Capitol Hill
rhetoric as it relates to high commodity prices. Over the last two months, we’ve
seen this group begin to liquidate their positions. Over the last two weeks,
they’ve begun to liquidate in earnest.
Certainly, some of the commodity markets have been trading
at prices far above any fundamental justification for quite some time. I’ve
written at length that there is little justification for crude above $100 per barrel.
Power outages in South Africa were a major contributor to the rise in platinum
and cocoa, as usual, is subject to the usual political and social turmoil. However,
the grain markets, have a substantial fundamental foundation to build from.
Just as there has been little justification for $140 oil, there is considerable
justification for “beans in the teens,” and corn at $6.50+ per bushel. In
general, this appears to be a case of, “throwing the baby out with the bath
Given the broad nature of the selloff and its corresponding
volatility, the most effective way to take advantage of a rebound in commodity
prices may be through the purchase of a commodity based currency like the
Australian Dollar futures. This currency is highly correlated to the commodity markets
and is also coming under technical pressure. The successive highs from June 6th
and July 18th were not confirmed by increasing open interest (black
vertical lines and lower magenta graph). Also, we have seen tightening
consolidation as the trend developed in ’08. Currently, we are sitting on the
weekly trend line at .9430. I would not be surprised to see the market violate
this trend. If the market trades down to its deeper support between .9221 –
.9321 and open interest does not increase on the violation of the weekly trend,
I think we have a golden opportunity purchase the Australian Dollar as a proxy
for a continued commodity based rally and further appreciation of the