Change in Consumption Habits Pressures Brazilian Orange Juice Future (market) Prices

02/13/2017 - 13h02

After touching a record high last November, the orange juice futures market has fallen by almost a third.

However, physical prices - which also rose last year - remain at record highs due to supplies being constrained.

Speculators are selling and booking profits after they had increased their exposure to the market late last year.

With Brazilian production expected to rebound this year after drought hurt the world's largest orange juice producer, supply problems are seen easing in the coming months.

"The market realised it got a bit carried away in the second half of 2016 with all the negative news on the supply side, so some selling was expected," says Andres Padilla, analyst at Rabobank in São Paulo.

The frozen concentrated orange juice (FCOJ) futures benchmark traded on the Intercontinental Exchange is now trading at $1.67 a pound, down from a record high of $2.35.

It is not the first time that FCOJ physical and futures have diverged, but the price moves come at a time when the futures market's link to the physical market seems to be getting weaker.

Unlike other agricultural commodities, where trading of the physical raw material such as grains, sugar, coffee and cocoa is hedged on the futures market, much of the orange juice trade is now conducted through forward contracts.

Trading volumes on the ICE FCOJ have fallen sharply, with the number of futures contracts traded in 2016 totalling 414,000 - more than half of that of 2005, according to data from the exchange.

That compares with 210m traded last year in the ICE Europe's Brent crude contract and 10m for ICE cocoa contracts traded in New York.

It is a far cry from the frantic trading seen in the 1983 Hollywood film Trading Placesstarring Eddie Murphy, centred around the FCOJ market.

The thin market means that the bid-ask spread, or the difference between the buying and selling prices offered in the market, makes it more risky to trade.

"Some people are worried that it's losing its economic viability. More and more people are calling me up and asking 'what's going to happen to FCOJ?'," says Jack Scoville, at brokers Price Futures Group in Chicago.

Volumes are declining partly because the futures contract is a frozen concentrated orange juice benchmark. Unlike 20-30 years ago, most US oranges are used to produce not-from-concentrate orange juice. About 10-15 per cent of Brazilian exports are still linked to ICE prices, but the "fruit to product" connection is weakening, say analysts.

Demand for the former breakfast staple is shrinking as it is increasingly regarded as a sugary drink at a time when an increasing number of consumers in developed markets are shunning carbohydrates.

"Even if we don't have a lot of [orange juice], nobody wants to drink it either," bemoans Mr Scoville.

With trading volumes dwindling, trading has become more volatile. Prices tend to overshoot on news of weather, crop forecasts and consumption, says Mr Padilla, who adds: "It's a tricky market, indeed."

Nevertheless, US and other orange growers and juice producers keep an eye on the ICE FCOJ market and if there is excess production, the futures market offers a place to sell the juice. "It is a well organised market which offers people flexibility," says Burak Kazaz, professor at Whitman School of Management, Syracuse University, Syracuse, who adds: "I doubt it's going to disappear."

For short-term speculators, it makes some sense to take profits on their futures positions at this juncture, say analysts. Global orange juice production for 2016/17 - ending in June this year - is forecast to rise as output from Brazil rebounds from the lowest level in almost three decades.

Bulls may want to listen to Brazilian agricultural forecasters who expect supply conditions to remain tight for some time as the output recovery may not be sufficient. Inventories held by juice processors and exporters were still low, and active buying of oranges continues, according to the economic research centre at the University of São Paulo's college of agriculture.

Looking at the supply and demand situation, especially in Brazil, "everything points to more of the same [for prices]", says Mr Padilla. "Perhaps $2.20 [a pound] is too high on the futures but $1.85-$2.00 is certainly realistic."