By Noble Drakoln

For 4,000 years, oranges have grown in Southeast Asia and China. The orange made its way to Europe during the Moorish occupation of Spain, eventually arriving in the New World. From these humble beginnings, a thriving orange industry has developed in both the U.S. and Brazil.

Prior to 1947, the traditional form of consumption for orange juice was fresh-squeezed; therefore, the commercial orange juice industry was constantly contending with the highly perishable nature of freshly squeezed oranges. Often, supply shocks were both quick and severe. The invention of frozen concentrated orange juice (FCOJ) in 1947 brought a new standard to the orange juice industry, opening the gates to an international marketplace that was not readily available before.

Until 1962, Florida dominated the orange juice export market. However, because of severe freezes and hurricanes throughout the years, it has been overtaken by Brazil, the world's leading FCOJ exporter in 2009. In the last 30 years, Brazil's dominance in the international market has become so complete that it represents 80% of all global exports. Brazil even supplies the U.S. with 30-50% of its orange juice. (Learn the contract specifications for a few of the most heavily traded commodities, in The Sweet Life Of Soft Markets.)

FCOJ's dependence on only two geographical regions has resulted in an extreme sensitivity to weather. When hurricane Katrina hit Florida in 2005, it ruined orange groves and drove the price of frozen concentrated orange juice from 90 cents per pound to $1.98 per pound. This occurred on the heels of orange juice reaching an all-time low of 60 cents per pound.

A sample commodity futures contract for orange juice is shown in the following table.

Frozen Concentrated Orange Juice Contract Specifications
Ticker Symbol Open Outcry: OJ
Contract Size 15,000 pounds
Deliverable Grades U.S. Grade A at 62.5 degrees Brix
Contract Months Jan, March, May, July, Sept, Nov
Trading Hours Open Outcry: Monday-Friday
Last Trading Day 14th business day prior to the last business day of the contract month.
First Notice Day First business day of the contract month.
Price Quote Cents per pound
Tick Size .05 cents per pound ($7.50 per contract)
Daily Price Limit 1. Movable 10 cents above or below previous day\'s settlement for first and second listed month.
2. Once the contract with the highest open interest hits this limit, a suspension is triggered.
3. New limit is 10 cents above or below the price at which the suspension was triggered.

Understanding FCOJ Contracts
Like every commodity, FCOJ has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

Oranges are juiced and shipped around the world in frozen form. The Brix system of measurement ensures uniformity in the quality of FCOJ that is traded between suppliers and buyers. Brix is defined as a measurement that quantifies the mass ratio of dissolved sugar to water in a liquid.

In the case of FCOJ, the Brix content or sugar content is required to be 62.5% of the actual product and the water content must be no greater than 37.5% of the product. The FCOJ contract size is measured as 15,000 pounds. The tick movement is based on a per pound basis. Each single tick move in FCOJ is based on -thousandths of a cent ($0.0005). Every $0.0005 movement is the equivalent of $7.50 per contract.

For instance, if you buy or sell a FCOJ futures contract, you will see a ticker tape handle that looks like this:

OJ8K @ 115.15

This is just like saying "Frozen Concentrated Orange Juice (OJ) 2008 (8) May (K) at $1.1515/pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $115.15 is equal to $1.1515/pound.) A trader buys or sells a FCOJ contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the FCOJ contract equals the equivalent of 15,000 pounds multiplied by our hypothetical price of $1.1515, as in:

$1.1515 x 15,000 pounds = $17,272.50

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. For example, to trade an FCOJ contract on the Intercontinental Exchange (ICE) your broker may require a margin of $1,890, which is approximately 11% of the face value of the FCOJ.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In FCOJ, a $0.0005 move is equal to $7.50. When determining ICE's FCOJ profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $7.50 For example, if prices move from $115.15 to $115.20, you take the difference, which is 5 cents and find it is the equivalent of $0.0005. This is one tick and is equal to $7.50.

- Buy Sell Total Value
FCOJ Contract Price ( .05 move = $7.50) 115.15 115.20 .05 cents or $7.50


FCOJ Exchanges
The Intercontinental Exchange (ICE) acquired the New York Board of Trade (NYBOT) in 2007 and now offers contracts in "Frozen Concentrated Orange Juice" and "Not From Concentrate Orange Juice."

Facts About Production
The price of FCOJ is driven by weather. Brazil's drought season occurs from July through November, while Florida experiences its freeze from December through March. Harvest is therefore a year-round affair, so crop and weather reports must be monitored often, especially at the beginning of each country's inclement season.

The industry has ridden a roller coaster in supply and demand numbers over the past 30 years. Drastic freezes in the 1980s lowered production numbers, yielding a mere 652 million gallons produced for the 1989-90 season. The 1990s saw a steady increase in production, more than doubling to 1.55 billion gallons. In the 1997-98 season, domestic consumption was pegged at 5.73 gallons per capita, with futures prices reaching a modest $1.28. The most recent decline can be partly attributed to competition with juices not from concentrate and other fruits.

An important item to consider is that much of Brazil's FCOJ production has been hit with citrus variegated chlorosis (CVC), a type of blight that could potentially affect the 250 million orange trees on which Brazil's third largest agriculture market depends.

Factors That Influence FCOJ's Price
The price of orange juice influenced by the following factors:
  • The navel orange is the product of a single mutation that occurred in 1820. A monastery in Brazil discovered this seedless variety of orange and began to export cuttings to the U.S.
  • Navel orange trees are a product of grafting and are therefore vulnerable to a number of diseases because the crops are so genetically homogeneous.
  • The Valencia orange is used for juicing when navel oranges are out of season.
  • Low-carbohydrate diets and alternative juices succeeded in driving down the demand for frozen concentrated orange juice in the early 21st century.
  • Over 1 million hectares of citrus fruit resides in Brazil, with the concentration in Sao Paulo.
  • In the 1950s, the introduction of a bacteria called Xanthomonas axonopodis pv. citri, the agent of citrus canker, became a problem. It took thirty years to eradicate and is still a very real threat.
  • In the mid-1980s, ready-to-drink (RTD) began its ascent to prominence, capturing 75% of the market share from frozen concentrated orange juice.
Conclusion
Frozen concentrated orange juice has a long and rich history in the Americas and around the world. Considering the significant health benefits that orange juice provides, this tasty drink will continue to play a significant role in the commodities landscape regardless of the form it takes. However, bearing in mind the level of sensitivity to weather and the homogeneous nature of orange trees, an epidemic could potentially devastate the industry.

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