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How to trade orange juice futures and the risks involved?


How to Trade Orange Juice Futures: Costs and Different Brokers

You can trade futures by opening a trading account with a trusted broker who handles futures trading. CME Globex, CME Clear Port, AmeriTrade and Etrade are some well known online platforms for trading futures.

Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.

Risks

Price movements in the orange juice futures market are sometimes unpredictable and erratic. Futures trading in this market is accompanied by several risks affecting the underlying commodity—the orange. These risks include:

1. Inclement Weather

FCOJ futures are considered a true weather market.

The orange juice industry is at risk whenever the weather changes too suddenly and unexpectedly. Frozen Concentrated Orange Juice in Florida and Brazil has to be protected against winter and hurricane seasons. One hurricane season can destroy orange trees that have been growing for years.

The damage to Florida crop does not impact FCOJ prices as drastically as it used to—thanks to the supply of orange juice from Brazil now. However, since more than 90% of the U.S. orange juice traded on the ICE comes from Florida, so weather patterns in Florida are still very important to Orange juice traders.

Florida is in the “hurricane alley” and has almost a 50% chance of being hit by a major hurricane or tropical storm every year! If traders get their weather predictions wrong, they will suffer huge losses. Orange juice futures are specially tricky in January—the peak of the winter season in Florida. Furthermore, Florida’s orange crop is falling in yield, which has caused orange juice prices to soar more unpredictably than before.

Oranges in Brazil have to fight their own battles—against dry weather and droughts. Brazil has a drought season from July to November. This is when traders need to monitor crop and weather reports even more carefully.

Florida and Brazil have opposite growing seasons, so if supply is affected for one region, it will impact the whole market. Orange juice futures are seasonal, rising during winter and suffering during March (frost season in Florida). Prices also rise in May and June, when Brazil is in the midst of drought season. This is why traders in orange juice futures should have strong weather forecasting tools.

2. Regulations

The FDA imposes strict import controls on orange juice imports, which need to be tested for certain harmful chemicals. When an import batch from Brazil tested positive for fungicide, it moved prices drastically in the markets. Similar events in the future will undoubtedly impact the futures market.

3. Disease and pests

The citrus-greening disease has affected the orange crop in Texas—which is a leading producer of oranges in the U.S. This has curbed supply and caused prices to spike. Citrus canker, citrus variegated chlorosis (CVC) and the Asian citrus psyllids also threaten the yield of oranges.

4. Consumer Demand

When orange juice prices soar, consumers can easily switch to hundreds of other beverages in the market. There is intense competition from other fruit juices, sodas and health drinks. This ease of substitution impacts futures prices.

5. Growth cycle

Orange trees can take up to 15 years to mature, so they have to be protected for a long amount of time to get substantial yield.

6. Leverage

Furthermore, Orange juice futures have a lot of leverage, which allows traders to control a large amount of commodities for a small amount of investment. However, it also means that even a small, unfavorable change in the prices of orange juice can drastically impact a traders’ entire equity.

Orange juice futures have followed an upward swing in recent years, but they are very thinly traded. If traders can minimize risks effectively, there is a potential to make substantial profits in the market. For traders interested in production information, the National Agricultural Statistics Service, Economic Research Service and USDA’s Foreign Agriculture Service all supply information on supply and demand monthly, quarterly and annually. Brazilian Association of Orange Juice Exporters (Abecitrus) supplies information on Brazil’s orange industry. FCOJ traders should also look at the data published bi-annually by the Florida Agricultural Statistics Service, which supplies information about the number and type of citrus trees, including how many trees are producing fruit. All of this information will help traders make wiser and more effective trades in this market and cash in on the substantial profits that orange juice futures can provide.

 

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