In an April 20 Barchart article, I wrote, “The illiquid FCOJ has rallied to an all-time high, and the trend remains bullish on April 20, 2023. However, when the price turns south, watch out! The lack of liquidity that drove prices to $2.8750 or potentially higher during the current trend could lead to an ugly plunge as the lack of participation favors boom-and-bust price action.”
The old saying “don’t fight the tape” dates to when stock prices were disseminated via a ticker tape. Rising or falling prices or the current trend is our best friend in markets across all asset classes, and FCOJ is no exception as the soft commodity rose to another higher high in May.
New highs in FCOJ
The long-term trend in frozen concentrated orange juice futures dating back over five decades reflects higher highs.
As the chart from 1970 shows, the bullish pattern continues to take orange juice futures to new highs in 2023, with the latest move to $2.9590 per pound in May. FCOJ made new record peaks in 1977, 1981, 1982, 1984, 1988, 1990, 2006, 2007, 2012, 2016, and 2023.
The least liquid soft commodity
FCOJ futures have the lowest open interest of the five soft commodities that trade on the Intercontinental Exchange (ICE). The following highlights the number of open long and short positions in the soft commodities sector as of June 2, 2023:
- Sugar- 1,000,634 contracts
- Coffee- 204,496 contracts
- Cocoa- 338,572 contracts
- Cotton- 200,700 contracts
- FCOJ- 9,779 contracts
Open interest is a critical factor that determines liquidity. Low levels tend to lead to more volatility and price gaps on the up and downside.
The reasons for the rise- Backwardation
Supply concerns have gripped the FCOJ futures market in 2023:
- The U.S. orange crop has declined to an 86-year low.
- Florida, a leading orange-producing state, has experienced significant migration, leading to construction on land formerly used for growing oranges.
- Rains in Brazil, the world’s leading orange-growing country, have caused supply concerns and prices to rise.
The supply concerns have created a backwardation in the FCOJ futures market.
The chart showing the forward curve for FCOJ futures out to May 2026 highlights progressively lower prices. However, all prices are above the $2 per pound level. Backwardation in a commodities market signified supply shortages or concerns, but it also assumes that producers will increase future output as high prices encourage more production.
The potential for a plunge
With nearby FCOJ prices for July delivery at over the $2.70 per pound level on June 2, the potential for a sudden and violent decline is rising. We have seen examples of significant rallies and sharp corrections in cotton and coffee markets over the past years.
Cotton futures rose to $1.5802 in May 2022 and dropped 55.6% to a 70.21 cents per pound low in five months in October 2022.
Arabica coffee futures reached a high at $2.6045 in February 2022 before plunging 45.5% to $1.4205 eleven months later in January 2023.
It is not a question of if FCOJ will experience a similar correct but when and from what price level? The potential for a move to $3 is high, as the bullish trend is always your best friend. However, when FCOJ runs out of upside steam, watch out because cotton and coffee futures are far more liquid, and the low open interest could cause a significant downside gap during a selloff.
No ETF or ETN products- Futures are the only way to join the FCOJ party
Sugar, coffee, cotton, and cocoa futures all have ETF or ETN products that track the price action in the soft commodities. FCOJ’s open interest is so low that no issuer has rolled out ETFs or ETNs that follow orange juice futures prices. Therefore, the highly volatile and margined ICE futures contract us the only route for a risk position. At $2.7470 on June 5, the original margin requirement is $3,795 per contract, which contains 15,000 pounds and is worth $41,205. The original margin is 9.2% of the contract value, with a maintenance margin requirement of $3,450 per contract.
In the classic film Trading Places, Billy Ray Valentine and Louis Winthrope III made a fortune shorting FCOJ, while commodity moguls Mortimer and Randolph Duke lost their fortunes on the long side of the OJ market. In the current environment, another selloff could be on the horizon, but be careful, as the price could continue to rise longer than shorts can remain solvent.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
