Ole Hansen
It’s been the best weekly performance for commodities since September last year, with the Dow Jones UBS Commodity Index up by more than three per cent. Precious metals, energy and grains led the gains. Orange juice prices are well down.
Article / 28 September 2016 at 13:45 GMT

Look to juice orange as fundamentals tango with technicals

Saxo Bank
  • Orange's 75% rally since January driven by supply side weakness
  • Fundamentals support case for more futures growth
  • Technical charts indicate a correction could be in play
  • A long strangle in options offers traders a chance to play this both way

Orange futures have risen 75% since the start of the year. Photo: iStock
By Stefan Vegh

We have seen an impressive rally in orange juice futures this year from January lows by more than 75%. It's the supply side that's to blame as demand for orange juice is steadily declining amid rising competition from other beverages like energy drinks. 

Orange Juice futures since 2004

 Source: Saxo Bank

According to Bloomberg, a recently study by the research arm of the University of Sao Paolo pointed to the negative effect of severe weather conditions to the orange yields. In the world’s biggest orange producer, Brazil, excessive rain is raising the threat of fungal disease for the orange fields, while the nation’s orange juice concentrate stocks fell to historically lows.

Severe weather conditions are hitting stock levels
There were also some concerns over the effect of the Atlantic hurricane season. Even though tropical storm Hermine mainly missed the key Florida orange fields, the threat has not entirely gone.

And now let’s look at the main concern traders and commercials are focusing on currently.

The biggest threat for the next season is the Citrus Greening Disease, which causes the death of the entire orange plant. In September the USDA reported that in the 2015-16 season, 32% of oranges in Florida fell from the trees before the harvest. The shocking fact is that five years ago this figure was only 7% on average 

Yes, I know what you’re thinking — the orange farmers had a tough year and the outlook is not rosy either. According to the USDA, the increasing cost of orange production forced farmers to quit production on more than 130 tsd. acres in Florida which could cause a significant decline in production next year.

Production is on the decline
Looking at these figures, it seems that for orange juice futures the sky  is the limit… or at least the all-time high of around 225 cents is on the horizon. The key question here is if the market with declining demand can digest an increase in the prices of orange juice.

For sure it will put additional pressure on the willingness of consumers to choose juice for breakfast and this is not good news for the farmers.

The data from CFTC shows that activity in orange juice futures trading is increasing as open interest reached almost 20 tsd. lots which is still below the 46,000 levels reached in December 1997. Meanwhile, the short positions of producers — used mainly to fix the prices and hedge the physical delivery— in July reached levels not seen since 2013. 

We could spot a similar pattern in hedge funds positioning when their speculative long bets reached new highs in July, but in August pushed back due to good news from Brazilian production. However hedge funds seems to be back in the game recently as the speculative long have increased the last three weeks in a row while commercials have stopped hedging which could be a sign of a further rally.

hedge-funds positioning as commercial shorts grow
Source: Saxo Bank

The technical picture on the charts seems to be conflicting the fundamentals. The weekly chart shows a developing divergence on the MACD histogram and Stochastics (for confirmation it shouldn’t close higher than Friday's close of 203.70). The momentum indicator shows a broken trendline which is often the leading indicator to a change in the main trend in the underlying price.

What MACD and stochastics show
Source: Saxo Bank

On the daily chart, the 200-cents level was last week broken but the market is testing it again as support this time. Also some indicators have already reached overbought levels and the rest is also heading there, but we will need some more time for confirmation…

Source: Saxo Bank
The technical setup seems to hint we could see a correction soon. Being a contrarian, we can try to play this against the fundamentals by buying a put option or a long put spread to decrease the cost of the strategy (ticker OOJ:icus on SaxoTrader) for December 2016 expiry to avoid a rapid time decay. This will keep you still on the safe side with a fixed risk if the rally continues based on the fundamentals.

This view I would consider as confirmed if orange juice close belows $2 with targeting the $1.95-90 zone or even 1.75. 

If you think on the other hand that the fundamental picture doesn’t look good and it will beat the technical signals long term, you may aim at the next resistance at 209.40 (December 2006 high) and then 226.95 (January 2012 high) with a long call option strike or long call spread with a longer expiry, where February 2017 seems to have little more liquidity.

However if you think that both sides look promising, a long strangle could be a choice for you. This means you buy an OTM call and OTM Put option and you may profit from a correction as well as from a continuation of the rally.

Now there's one happy customer who looks like her love of orange
juice isn't likely to go away any time soon. Photo: iStock

— Edited by Martin O'Rourke

Stefan Vegh is a trader at Saxo Bank's Cyprus office
04 October
Stefan Vegh Stefan Vegh
UPDATE : The prices of november contract spiked to 218.25 last week so you could take some profit on the long calls. Now the whether may change the situation as after hitting Haiti Hurricane Matthew is approaching Florida, the worlds second biggest orange producer. On the Map below you can see the predicted route of the storm...


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