Orange Juice Squeeze

Smallest Florida Orange Crop in 17 Years Points to Higher FCOJ Prices through 4th Quarter
This week marked the first official USDA Florida Orange crop estimate of 2006. The bottom line of the long awaited report caught even the bulls off guard. The USDA pegged the 2006/07 Florida Orange crop at 135 million boxes, the smallest crop in 17 years and well below most analyst’s estimates. Florida is the US’s largest producer of oranges with over 90% of production going towards the manufacture of Orange Juice, much of which is used to satisfy the FCOJ contracts traded at the New York Board of Trade.

FCOJ prices have already been in a bullish mode for over two years as a combination of events have chipped away at the production capabilities of Florida groves.
Significant is that Florida orange production has not only suffered from loss of yields over the last few years due to trees producing less fruit, the market is also dealing with loss of trees, which will have a major impact on long term production.
The initial shock came when a total of four considerable hurricanes roared through Florida’s growing regions in 2004, when the market initially began pricing the damage to the current supply. When a second round of storms battered central Florida the following year, the market again raced to new highs to account for orange production loss to the 2005 crop. What was not immediately known was the longer term damage done to Florida orange trees and it’s impact on future production.
What was not known then is now becoming clear. Florida groves suffered substantial long term damage, having lost over 16% of their commercial citrus trees. The state is now down to about 65 million fruit bearing trees, enough for a decent crop in a high yielding crop year but still not enough to come close to production figures of only a few years ago.
In the five years prior to the summer of 2004, Florida produced an average of 226.2 million boxes of oranges per year (1999-2003). 2004’s storm damaged crop produced only 149.6 million boxes of oranges. 2005 faired only moderately better, producing 151 million boxes of oranges. This means that for two years running, Florida groves have produced roughly 34% less oranges than their previous 5 year average. This shortfall in supply has resulted in one of the most sustained bull markets in all of commodities over the last two years. Louis Drefus’s 160 million box estimate for the 2006/07 crop back in August was already considered a bullish figure as the market began pricing in a third consecutive substandard production year. With the USDA now pegging the crop even below 2004 and 2005’s paltry figures, it is evident that there were other factors at work that eroded 2006 yields. (To see James Cordier’s last forecast for 2006 FCOJ prices Live on CNBC, August 29, 2006, Click Here )
The freeze back in February 2006, thought to be benign at the time, appears to have had an impact on yield after all. And the canker eradication campaign that has continued in 2006 has cut into production yields as well.
The outlook for Florida orange production continues to point to scarcity beyond 2006. The fact that growers have been slow to replant trees does not bode well for future orange production. With Florida’s bulging population, land hungry developers are making some attractive offers to Florida growers and many are accepting. With production down and land prices skyrocketing, many growers figure this is a good time to sell. However their gain is the market’s loss and the FCOJ contract will have to rely more heavily than ever on Brazilian oranges to fill the void. However, not only can Brazil not cover the entire shortfall, their oranges are more expensive to ship (they must be imported into the US), and they are harvested at a different time of year.
In addition to land loss, replacement trees for remaining groves will be in short supply for the next several seasons. The canker eradication campaign mentioned above destroyed a substantial chunk of nursery stocks meaning seedlings will be in short supply. As it takes nearly 3 years for newly planted trees to bear fruit, it could be 3-5 years before even remaining groves can get back to pre-2004 production numbers.
Despite this week’s massive rally, we think juice still has some upside adjustments to make to prices given this week’s supply numbers. Our price projection is for FCOJ futures to surpass the $2.00 per pound level and possibly push towards the $2.20 range before harvest begins in early December.
While our outlook remains bullish, our recommendation is not to buy futures, and not to buy calls. We advise selling puts in this market as the highest probability way to profit from the bull market in OJ. Timing futures trades, even in trending markets, is difficult. With put selling, one does not need to determine where prices will go, only where prices will not go. Therefore, in selling puts at strikes well below the current price of OJ, one does not necessarily need FCOJ prices to continue climbing to profit. Although one should be comfortable with the risks involved in writing option premium before embarking on a campaign, the put seller’s only profit requirement is for prices to remain above his strike price through expiration.
Many traders talk of trading with the trend but few find it easy to do so, instead seeking fast and sizable rewards by trying to pick tops and bottoms. We advise against this. As we state repeatedly in our book and our columns, selling options in favor of the trend is one of the highest probability trades an investor can execute. In FCOJ, we have a solidly entrenched, long term uptrend with a sound fundamental justification.
At the very least, it is our opinion that it will be difficult for FCOJ to reverse trend and head substantially lower when facing the third strait year of anemic production and a the likelihood of additional shortfalls in years to come. For this reason, we think a correction next week will provide opportunities to sell put premium far beneath the market.
If you would like more information about selling options in the orange juice market or building a portfolio based on the option selling approach, please feel free to call or visit us on the web at
By: James Cordier, Michael Gross, Liberty Trading Group
Be sure to catch James Cordier’s New Forecast for 2006 NYBOT Orange Juice prices Live on CNBC, Monday, October 16th at 10:20 am EST

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