This week marked the first official USDA Florida Orange crop estimate of 2006. The bottom line of the long awaited report caught even the bulls off guard. The USDA pegged the 2006/07 Florida Orange crop at 135-million boxes, the smallest crop in 17 years and well below most analysts’ estimates. Florida is the United States’ largest producer of oranges with over 90% of production going towards the manufacture of frozen concentrate orange juice (FCOJ), much of which is used to satisfy the FCOJ contracts traded at the New York Board of Trade.
FCOJ prices have already been in a bullish mode for more than two years as a combination of events have chipped away at the production capabilities of Florida groves.
It’s significant that Florida orange production has not only suffered from trees producing less fruit, the market is also dealing with loss of trees, which will have a major impact on long term production.
The initial shock came when four considerable hurricanes roared through Florida’s growing regions in 2004, when the market initially began pricing the damage to the current supply. When a second round of storms battered central Florida the following year, the market again raced to new highs to account for orange production loss to the 2005 crop. What was not immediately known was the longer-term damage done to Florida orange trees and its impact on future production.
Now it is becoming clear Florida groves suffered substantial long-term damage, having lost over 16% of their commercial citrus trees. The state is now down to about 65-million fruit bearing trees, enough for a decent crop in a high-yielding crop year, but still not enough to come close to production figures of only a few years ago.
In the five years prior to the summer of 2004, Florida produced an average of 226.2-million boxes of oranges per year (1999 to 2003). 2004’s storm damaged crop produced only 149.6-million boxes of oranges. 2005 faired only moderately better, producing 151-million boxes. This means that for two years running, Florida groves have produced roughly 34% fewer oranges than the previous five-year average. This shortfall in supply has resulted in one of the most sustained bull markets in all of commodities over the last two years. Louis Drefus’s 160-million box estimate for the 2006/07 crop back in August was already considered a bullish figure as the market began pricing in a third consecutive substandard production year. With the USDA now pegging the crop even below 2004 and 2005’s paltry figures, it is evident that there were other factors at work that eroded 2006 yields. (To see James Cordier’s last forecast for 2006 FCOJ prices Live on CNBC, Aug. 29, 2006: http://www.libertytradinggroup.com/news.html.)
The freeze in February 2006, thought to be benign at the time, appears to have had an impact on yield after all. And the canker eradication campaign that has continued in 2006 has cut into production yields as well.
The outlook for Florida orange production continues to point to scarcity beyond 2006. The fact that growers have been slow to replant trees does not bode well for future orange production. With Florida’s bulging population, land hungry developers are making some attractive offers to Florida growers and many are accepting. With production down and land prices skyrocketing, many growers figure this is a good time to sell. However, their gain is the market’s loss and the FCOJ contract will have to rely more heavily than ever on Brazilian oranges to fill the void. However, not only can Brazil not cover the entire shortfall, their oranges are more expensive due to shipping and they are harvested at a different time of year.
In addition to land loss, replacement trees for remaining groves will be in short supply for the next several seasons. The canker eradication campaign mentioned above destroyed a substantial chunk of nursery stocks meaning seedlings will be in short supply. As it takes nearly three years for newly planted trees to bear fruit, it could be three to five years before remaining groves can get back to pre-2004 production numbers.
Despite this week’s massive rally, we think juice still has some upside adjustments to make given this week’s supply numbers. Our price projection is for FCOJ futures to surpass $2.00 per pound and possibly push towards the $2.20 range before harvest begins in early December.
While our outlook remains bullish, our recommendation is not to buy futures and not to buy calls. We advise selling puts in this market as the highest probability way to profit from the bull market in OJ. Timing futures trades, even in trending markets, is difficult. With put selling, one does not need to determine where prices will go, only where prices will not go. Therefore, in selling puts at strikes well below the current price of OJ, one does not necessarily need FCOJ prices to continue climbing to profit. Although one should be comfortable with the risks involved in writing option premium before embarking on a campaign, the put seller’s only profit requirement is for prices to remain above his strike price through expiration.
Many traders talk of trading with the trend but few find it easy to do so, instead seeking fast and sizable rewards by trying to pick tops and bottoms. We advise against this. As we state repeatedly in our book and our columns, selling options in favor of the trend is one of the highest probability trades an investor can execute. In FCOJ, we have a solidly entrenched, long-term uptrend with a sound fundamental justification.
At the very least, it is our opinion that it will be difficult for FCOJ to reverse trend and head substantially lower when facing the third-strait year of anemic production and a the likelihood of additional shortfalls in years to come. For this reason, we think a correction next week will provide opportunities to sell put premium far beneath the market.
If you would like more information about selling options in the orange juice market or building a portfolio based on the option selling approach, please feel free to call or visit us on the web at www.optionsellers.com.
Be sure to catch James Cordier’s New Forecast for 2006 NYBOT Orange Juice prices Live on CNBC, Monday, October 16th at 10:20 am EST
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James Cordier is head trader and president of Liberty Trading Group, a futures brokerage firm specializing in option writing on commodities. James’ market comments are published by several international financial publications and worldwide news services including The Wall Street Journal, Reuters World News and Bloomberg Television News. Michael Gross is an analyst with Liberty Trading Group. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at bookstores and online retailers now.
***The information in this article has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.
