Just Keeps on Getting Bigger!
Fundamentals
That was the cry from OJ traders after the USDA released its estimate for the 2009-10 Florida orange crop. The USDA raised the crop size by 2 million 90-pound boxes to 133.6 million boxes. This was on the lower end of analysts' pre-report estimates for a 2 to 3-million box gain. The increase was attributed to larger fruit size on the remaining Valencia crop that is still awaiting harvest. The total US 2009-10 orange crop was also raised buy 2 million boxes from the May 1st estimate to 194.2 million boxes. Despite the larger fruit size, the USDA did keep their yield estimate unchanged at 1.55 gallons per box. Now that the current orange crop harvest is nearly complete, many traders will turn their focus to the 2010-11 season, with ideal growing conditions so far leading analysts to expect orange production to increase to over 160 million boxes. There was a large increase in Florida orange movement recently, totaling just over 6.1 million gallons for the week ending May 29th. This was nearly 3 times the previous week's totals, with much of the juice expected to be shipped to Europe. Although OJ futures have remained range-bound the past couple of months, speculators continue to hold a bullish bias. According to the most recent Commitment of Traders report, the combined net-long position held by both non-commercial and non-reportable traders totaled 14,889 contracts as of June 1st. Although this was a decline of 1,605 contracts for the week, speculators are hesitant to get short OJ futures as we head into the beginning of the Atlantic hurricane season -- especially in light of forecasts that we could be in store for an active tropical storm season this year.
Trading Ideas
With the "official" start of the Atlantic hurricane season having occurred on June 1st, some speculators honor the season by purchasing out of the money call options in OJ futures options as a speculative play should a tropical storm strike the citrus growing regions of Florida. This buying tends to "inflate" the price of options tied to the fall contract months of September and November. Some traders looking to take advantage of the relatively high premiums afforded in these calls but who wish to limit their potential risk could consider investigating selling call spreads in OJ options. An example of this trade would be buying the November OJ 200 calls and selling the November 170 calls. With November Orange Juice trading at 141.10 as of this writing, the spread could be sold for about 2.50 points, or $375 per spread, not including commissions. The credit received would be the maximum potential profit on the trade. Given the potential risk on the trade, traders should have an exit strategy in place should the trade move against them.
Technicals
Looking at the daily chart for September OJ, we notice prices hovering near both the 20 and 100-day moving averages. This is a classic sign of a market that is trending sideways. Even the 14-day RSI is holding neutral, with a current reading of 51.63. 147.25 looks to be the next major resistance point for the September contract, with support found at the April 8th lows of 130.70.
Mike Zarembski Senior Commodity Analyst
