Private Forecasters Cannot Agree on Size of Florida Orange Crop
Fundamentals
Traders of frozen concentrated orange juice futures (FCOJ) were in for a wild ride last Friday, as two leading private forecasts regarding the size of the 2009-10 Florida orange crop varied widely. FCOJ futures prices fell sharply, after widely followed analyst Elizabeth Steger released her Florida Orange crop estimate of a 154 million 90-pound boxes. This was well above most traders' estimates of a crop size closer to 145 million boxes. The estimate, which came out just minutes before the close of trading, sent prices down over 8%. However, not everyone agrees with Ms. Steger's estimate, as just after the close, the market received the crop estimate from juice processer Louis Dreyfus, which came in at a much more friendly 141 million boxes. Both estimates are well below the 162.1 million box crop seen in the 2008-09 season, as a dry spring and below normal winter temperatures were expected to affect this season's crop size. Florida's orange production has been down the past several years, as various citrus diseases, urban development and hurricanes have laid claim to a large number of citrus groves. With both private forecasts now out of the way, OJ traders will be watching the weather forecasts for the development of tropical activity as the Atlantic tropical storm season moves into its traditionally peak month of September. Any signs of impending strong storms forming in the Atlantic could spark traders into building in a risk premium into OJ futures and futures options prices. The first major government forecast is scheduled on October 9th, when the USDA releases its first projections. In the meantime, traders should be "juiced-up" for increasing volatility in the OJ market.
Trading Ideas
Despite Friday's sharp sell-off in OJ futures, the bullish trend in prices remains intact. Given that we are now at the start of the peak hurricane season, options are relatively expensive. Traders who expect prices to continue to move higher may wish to give some consideration to purchasing bullish call spreads in OJ options. The benefit in purchasing call spreads is that the premium received from the short leg of the spread will help to partially offset some of the initial cost of the long leg of the spread. The downside is that by selling a higher strike option, you are limiting potential gains should OJ futures move well above the short leg of the spread. With November OJ trading at 105.05 as of this writing, a 110/130 bull call spread could be bought for about 5.50 points, or $825 per spread, not including commissions. The premium paid is the maximum loss on the trade, with a maximum profit of $3,000 minus the premium paid, should November OJ be trading above 130.00 at option expiration on October 16th.
Technicals
Looking at the daily chart for November Orange Juice, we notice the market has been in an uptrend since the weekly lows were made on June 29th at 79.00. Since that time, prices have rallied over 35 cents per pound, as traders began to anticipate a smaller Florida orange crop as well as tighter supplies. However, yesterday's sell-off moved prices below the widely watched 20-day moving average, which triggered a sell-signal by short-term momentum traders. The market was ripe for a correction, as large speculative accounts may have become a bit too long. The most recent Commitment of Traders reports shows large non-commercial traders added an additional 1,442 net long contracts as of August 11th. Small speculators were also becoming more bullish, with non-reportable traders adding 1,481 net-long contracts last week. Ironically, this occurred just before the recent highs were made, and the recent sell-off should help shake out these weak longs that came to the bullish party a bit late. The 14-day RSI has turned lower, after spending time last week in overbought territory, with a current reading at a very neutral 47.56. Last Wednesday's highs of 114.75 are now seen as resistance for the November contract, with support found at the August 3rd lows of 93.00.
Mike Zarembski, Senior Commodity Analyst
