Bears Getting Squeezed in O.J. Futures
Fundamentals
Orange Juice futures have quietly slipped into the bullish radar screen, as the most-active July contract has moved to nearly 6-month highs. Some signs of improved demand have emerged, as lower retail prices have led to increased consumption the past several weeks. Also supportive was lower orange imports, as depressed FCOJ prices earlier this year helped to lower orange demand from Brazil. Now traders will turn their attention to the actual size of the 2008-09 Florida orange crop, as the USDA will release its monthly crop production at 7:30 am Chicago time today. Last month, the USDA lowered its estimate by 400,000 boxes to 157.6 million 90-pound boxes, versus 170.2 million boxes last season, as continued dry weather in the Florida "Orange Belt" hurt production. This month analysts are looking for a continued decline in production, with estimates ranging from unchanged to as much as a 2-million box decline on continued drought conditions. Juice yields are expected to remain steady at 1.64 gallons per box. The recent rally has drawn the attention of some speculators, as the most recent Commitment of Traders report shows speculative accounts holding a net-long position of 10,577 contracts as of May 5th. This is up 1725 contracts for the week, with a majority of the long position being held by "large" non-commercial traders. Though the final crop estimate will not be released until July unless weather conditions start to improve, it appears that orange production will continue to decline this season, with drought, disease and decreased acreage continuing to hamper the Florida crop.
Trading Ideas
Though prices have rallied 30 cents since the mid-February lows, prices are still well below the levels seen last season. Traders who believe that FCOJ futures still have some room to the upside may wish to explore bullish call spreads in OJ options. An example of such a trade is buying a September OJ 100 call and selling a September 130 call. With September OJ futures trading at 96.45, this spread could be bought for around 6.00 points, or $900 per spread. The cost of the spread would be the maximum loss on the trade, with a potential profit of 30.00 points, or $4500, minus the premium paid, if September OJ futures are trading above 130.00 at expiration in August.
Technicals
Looking at a 60-minute chart for July Orange Juice, we notice the market breaking out to the upside on May 4th. Since that time, the July contract has gained nearly 10 cents. Prices were hovering near the 20-period moving average late last week, until the next price surge upward this morning. Some of this fresh buying may be tied to short-covering by some commercial traders who are net short the market ahead of tomorrow's USDA report. Momentum is in favor of the bulls, with the 14-period RSI reading 65.23. Near-term support is seen near 91.40, with major resistance at 100.00.
Mike Zarembski, Senior Commodity Analyst
