Before 2023, the all-time high in the thinly traded frozen concentrated orange juice futures market (FCOJ) was $2.35 per pound in November 2016. After reaching that lofty level, the price dropped like a stone to below $1 per pound in 2019 and hovered around the $1 pivot point in 2019 and 2020. In 2021 and 2022, FCOJ moved steadily higher before exploding in 2023.
In an August 18 Barchart article, I asked, “Can OJ Futures Keep Rallying?” The most recent record high was $3.4115 per pound when I wrote, “OJ prices are in dangerous territory above $3 per pound, but the trend remains bullish, and higher highs are possible. Fighting a trend can be more than challenging. When the trend bends, we could see OJ prices fall as fast, if not faster, than they rallied.”
The trend has not bent, and FCOJ continued to reach higher highs.
FCOJ rose to nearly $4 per pound
ICE frozen concentrated orange juice (OJX23) futures prices rose to new highs in September as the bullish trend continued.
The monthly chart highlights the rally to the $3.90 per pound high on the continuous futures contract. At just above the $3.60 level for November delivery on September 27, FCOJ futures remain in a bullish trend.
Thin trading conditions can exacerbate price volatility
As of September 26, the total number of open long and short positions in the ICE FCOJ futures contracts was 9,743, the lowest of the five soft commodities. ICE sugar, cocoa, coffee, and cotton futures have open interest levels far above FCOJ.
Meanwhile, the daily volume tends to be below 1,000 contracts, lower than the other soft commodities trading on the Intercontinental Exchange. As the most illiquid of the soft commodities, FCOJ is susceptible to the most volatility. Low open interest and volume tend to make bids to buy disappear during selloffs, and offers to sell evaporate during rallies, causing high volatility and price gaps. The illiquidity continues to exacerbate the fundamental reasons that led to the rally in FCOJ.
Demand elasticity should kick in eventually
In commodities, prices tend to fall to levels where production and inventories decline, and consumers increase purchases, leading to bottoms that push prices higher. Conversely, price rallies cause production increases, inventories build, and consumers begin to reduce purchases. The elasticity of demand will likely cause the demand for orange juice to decline, with prices near the $3.50 per pound level. Fewer consumer purchases would likely cause prices to turn lower from the current record-high level.
OJ is not the only food product reaching record peaks
While FCOJ has reached a record high, it is not the only soft commodity that has rallied since 2022. Last year, cotton and coffee futures reached the highest prices since 2011. In 2023, sugar futures rallied to the highest price in a dozen years, and cocoa futures reached a multi-decade peak.
Over the past weeks, live and feeder cattle futures rose to record highs. Beef prices have moved to all-time peaks alongside FCOJ as food prices continue to signal inflationary pressures. Nearby crude oil is back over the $90 per barrel level, increasing energy costs, a critical production cost for the farmers and ranchers that produce the products that feed the world.
No ETFs, futures, and futures options are thin, but they are the only available OJ route
The odds continue to favor a correction in the FCOJ futures arena. While the price of November futures backed off from $3.90 per pound to $3.60, the highest price for the soft commodity before 2023 was the November 2016 $2.35 high. FCOJ futures already moved nearly 66% higher from that level over the past weeks.
Meanwhile, the bullish trend continues, and a move above the $4 level is not impossible before a long-overdue correction.
FCOJ futures are highly illiquid, precluding any ETF or ETN products, as market-makers cannot hedge the risk of the derivatives. Therefore, the only route for a risk position in FCOJ is via the ICE futures market. While the potential for a significant decline increases with the price, the risks are commensurate with the potential rewards. Anyone looking to dip a toe into FCOJ on the short side must have a defined risk-reward plan. If prices rally, stopping out and reestablishing a short position at higher levels is rational. Stick to the risk levels when the price moves contrary to expectations.
If FCOJ begins to decline, remember that a short position is at the current market price, not the execution price level. Adjust risk-reward to reflect the current market price, lowering stop levels and increasing potential profit horizons. Discipline is critical in profiting in illiquid markets like FCOJ.
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.
