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1 August 2024
“When you have a lack of supply that’s unable to meet demand, consumer prices shoot up.”
Recently, the situation with orange juice has caused significant global concern. Production for 2023-2024 is expected to decrease by 3%, with Brazil, the world's leading producer, experiencing a 9% drop due to the reduced availability of fruit for processing. The primary causes of this decline are diseases such as citrus greening and extreme weather conditions, particularly drought and high temperatures caused by the El Niño phenomenon.
These factors have led to a significant loss of harvest, with an increase in fruit drop rates and a reduction in production per tree. Consequently, concentrated orange juice prices have risen sharply by 26.82% since the beginning of 2024, with the September '24 futures contract closing at $442.40 on Wednesday.
I will analyse a spread that, however, presents a high risk due to both the volatility of the commodity and the current situation with orange juice. The spread is OJF25-OJH25, and below you can briefly read the graphical analysis. The spread has a bullish seasonality, which aligns with the fundamental analysis, running from mid-August/mid-September until mid-November/mid-December. Here is the chart with the 5- and 15-year seasonal models.
The seasonal window highlighted in green shows the bullish 5- and 15-year seasonal models. If we look at the price level, as shown in the Continuous histogram chart, it is not low and is located in the upper part of the 5th-95th percentile range. However, it is very clear that in the presence of anomalies, the spread has risen well above that range in the past.
Another aspect that makes the spread risky is the low volumes (and open interest), especially for the March 2025 delivery; this spread is suitable only for experienced traders. The anomaly currently affecting orange juice is easily understood by looking at the term structure, with the current curve in backwardation and the 15-year average in contango.
In conclusion, OJF25-OJH25 is very interesting due to the issues currently affecting orange juice. The likelihood that futures could rise again and retouch the all-time high reached at the end of May, if the situation remains unchanged over the coming weeks, is high. However, due to the nature of the commodity and the existing risks, this spread is suitable only for experienced traders.
Recently, the situation with orange juice has caused significant global concern. Production for 2023-2024 is expected to decrease by 3%, with Brazil, the world’s leading producer, experiencing a 9% drop
