Liquidity fosters smooth price variance as buyers and sellers can execute transactions during price moves. Meanwhile, futures suffering from low volume and open interest often experience wild price swings on the up and downside. When the volume and the total number of open long and short positions in the futures market are low, bids to buy can disappear when prices drop, and offers to sell can evaporate when prices increase. FCOJ is the least liquid member of the soft commodities sector, and over the past weeks, the price exploded to a record high as supply concerns and rising production costs gripped the market. Brazil is the world’s leading orange-producing country, but Florida and California are also significant orange-producing states.
In my Q1 soft commodities report on Barchart, I highlighted that FCOJ was the best-performing member, with a 30.57% quarterly gain after rising 41.08% in 2022. The buying continued in early Q2 2023, with FCOJ rising to another record peak.
New highs in Q2 2023
In Q1, FCOJ futures rose to a record $2.8250 high.
The chart highlights the bullish price action continued in early Q2, with May FCOJ futures posting a new all-time high at $2.8750 per pound on April 11. On April 20, FCOJ was above the $2.74 per pound level, within striking distance of the record peak.
Brazil is the leading orange producer
South America’s leading economy and most populous country, Brazil, leads the world in annual orange production.
Source: Statista
The chart highlights that Brazil’s climate makes the country the leader, producing more than twice the number of oranges as China, the second leading producer. While Florida and California are orange-producing states, the United States is the fifth top-producing country, behind Mexico and ahead of Egypt. The U.S. annual orange output in 2021/2022 was nearly one-fifth of Brazil’s.
Florida real estate and weather weigh on the crop
While the U.S. ranks fifth, demographic changes in Florida, have weighed on orange production. Many Floridian orange groves have become homes and condos as the demand for real estate has skyrocketed over the past years.
Meanwhile, the 2022 Floridian orange harvest was the worst since World War II, and forecasts for 2023 do not look much better. The devastating impact of Hurricane Ian was mainly to blame, but crop diseases and land demand also weighed on the crops.
Liquidity makes trading dangerous
Open interest measures the total number of open long and short positions in a futures market. In the soft commodities sector, the five commodities had the following open interest in contracts as of April 19:
- Sugar- 963,850 contracts
- Coffee- 190,481 contracts
- Cocoa- 323,082 contracts
- Cotton- 165,234 contracts
- FCOJ- 9,792 contracts
Open interest is a liquidity barometer, and as the data highlights, FCOJ is the least liquid soft commodity. Less liquid futures markets tend to be highly volatile, leading to price extensions on the up and downside.
There are no ETF or ETN products for the FCOJ market
ETF and ETN products have made soft commodities more accessible for traders and investors. The products that trade on the stock market exchanges have also increased liquidity. Market-makers and other market participants depend on the futures to hedge ETF and ETN risk exposure. The following ETF/ETN products tend to move higher and lower with the soft commodity sector members:
- Sugar- SGG is an ETN, and CANE is an ETF.
- Coffee- JO is an ETN.
- Cocoa- NIB is an ETN.
- Cotton- BAL is an ETN.
The ETFs and ETNs that move with the soft commodities trading on the Intercontinental Exchange (ICE) are possible because the four softs offer enough liquidity, or critical mass with open interest and daily volume, to support the products. FCOJ futures’ low liquidity makes it impossible for ETF or ETN products. Therefore, the only route for a risk position on the long or short side of the FCOJ market is via the ICE futures.
The illiquid FCOJ has rallied to an all-time high, and the trend remains bullish on April 20, 2023. However, when the price turns south, watch out! The lack of liquidity that drove prices to $2.8750 or potentially higher during the current trend could lead to an ugly plunge as the lack of participation favors boom-and-bust price action.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
