The orange juice market has rallied by more than 16% since June 25th and is now trading near $1.45 per pound. This marks nearly a complete recovery in prices from the sell off that was triggered by the late June, Department of Agriculture’s Cold Storage Report, which showed a 2% increase in inventories. Much of the rally that had led to the $1.55 high in May was due to speculative buying based on reports of, “citrus greening.” Citrus greening has been found in all of Florida’s main growing regions and leads to smaller oranges and less juice. However, Florida’s expected decline in production will be more than offset by other global issues, which will continue to pressure the market lower from these levels.
Global orange juice demand has been declining rapidly since the European economy began to collapse. The truth of the matter is that orange juice is a luxury good. Orange juice demand actually peaked way back in 1998 with global per capita consumption at 5.87 gallons per year. This amounted to a total supply of 1.8 million gallons or, 250 million boxes of raw oranges. The downward trend in demand has been tediously steady with 2008 providing the only uptick in demand over the last 15 years. Current consumption estimates stand at 3.85 gallons per capita or, less than 75 million boxes of total production.
The effect of the global decline in world orange juice consumption has taken its toll on the world’s largest exporter, Brazil. They are responsible for about 80% of the total world output. Their effort to gain market share from the U.S. over the last decade has led to a gross imbalance in the current marketplace. This has led to an about face in their agricultural strategy as the Brazilian government is expected to cull as much as 9% of total orange juice acres and redirect their efforts towards sugar cane which has a higher profit margin.
The macro trend of declining orange juice production is not lost within the commercial traders in the marketplace. Throughout the 1990’s and even into early 2000’s commercial traders were using the orange juice futures market to guarantee their supply. This means that commercial traders were generally net long and end line producers converting raw oranges into finished products were more concerned about high prices than they were about low prices. Therefore, spikes in commercial buying frequently led to long positions between 8,000 and 12,000 contracts. Most of these commercial buying splurges were followed by gains of more than 10% in the futures market, which shows that their actions have merit within the orange juice pricing structure.
The last time commercial traders owned more than 12,000 contracts was in June of 2008. Keep in mind that this was the drought year and all agricultural commodities soared. Perhaps, the penultimate accumulation of more than 12,000 contracts is more instructive from June of 2004. This is when orange juice traded down to a multi year low of $.55 per pound. Currently, the commercial position is net long a mere 1,300 contracts. This tells me that end line producers have no fear of citrus greening affecting the overall marketplace. Furthermore, this tells me that they’re not worried about locking in future production at these prices.
The macro factors we’ve discussed lead us back to the current market rally, which I believe will act as a dead cat bounce. Therefore, we intend to sell the September orange juice futures contract upon the first sign of a reversal to head lower. The current rally appears to be overdone and we expect it to culminate in a momentum divergence that will cue our first entry. This short trade also coincides with the midsummer trough before fears of late summer hurricanes and early winter frosts cause orange juice futures to begin to bottom. As always, we will be protecting our position with stop loss orders placed just above whatever the high ends up being. After all, whether we’re right or wrong isn’t as important as capital preservation. Meanwhile, continually seeking out low risk, high reward trading opportunities will take care of capital appreciation.
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