FCOJ Explode To A New Record Peak Before Correcting

In the futures arena, soft commodities trade on the Intercontinental Exchange (ICE). In a February 9 article on Barchart, I described the “Chicken-and-Egg” relationship between the Brazilian real and soft commodity prices. In that article, I highlighted that FCOJ exploded to a record high, surpassing the November 2016 $2.35 per pound peak. On February 9, FCOJ reached $2.6695 per pound, where they ran out of upside steam. 

At over the $2.40 level on February 17, FCOJ corrected but remained at the highest price in years. FCOJ is a highly volatile soft commodity with limited liquidity that adds to its price variance. 

FCOJ is the least liquid soft commodity

Open interest is the total number of open long and short positions in a futures market. The metric measures the hedging, speculative, and other interest in a commodity or asset. The five soft commodities that trade on the Intercontinental Exchange had the following open interest level in contracts as of February 17, 2022:

• World sugar- 930,535 contracts
• Cocoa- 294,210 contracts
• Arabica coffee- 199,061 contracts
• Cotton- 188,107 contracts 
• Frozen concentrated orange juice- 11,685 contracts

As the data shows, FCOJ is the least liquid soft commodity. Low open interest and volume levels tend to lead to extreme price volatility during rallies or downside corrections because bids to buy and offers to sell evaporate during price moves. FCOJ can be the most volatile soft commodity, as we recently witnessed. 

An explosive move runs out of upside steam

FCOJ rose to a record high in February 2023. 

The chart shows the spike higher to $2.6695 per pound on February 9, 2023. FCOJ futures surpassed the November 2016 previous record peak, which stood at $2.35 per pound. 

The March contract is rolling to May, and the price declined, with March falling to the $2.4020 level on February 17. 

The chart of May FCOJ futures shows that a backwardation caused the next active month contract to rise to a lower record high of $2.4890 per pound on February 9, 2023. The backwardation still existed on February 17, with the May futures at the $2.3355 level. 

Backwardation signifies nearby supply tightness or a condition where the demand exceeds current availabilities. 

The worst Floridian orange crop in nearly a century

In a January 2023 forecast, the U.S. Department of Agriculture expects Florida to produce 18 million 90-pound boxes of juicing oranges in 2023. The forecast was less than half last year’s crop and a 93% decline from the 1998 peak.  The bottom line is Florida orange production will be the lowest in nearly 90 years. 

Two factors have led to the decline in Floridian orange production. First, extreme weather damaged orange groves. Second, migration from other U.S. states to Florida has increased land values, causing orange juice producers to sell land to developers as the demand for new housing has soared.

Meanwhile, the U.S. is only the fifth-leading orange-producing country. 

Source: Statista

As the chart shows, Brazil leads the world in annual orange production, followed by China, the E.U., and Mexico. Brazil produces more than double the oranges as China, the world’s second-leading producer. 

While forecasters believe Brazil will produce more oranges in 2023 than in 2022, inflation has caused production costs to increase, putting upward pressure on orange prices. 

The reaction of the futures market to the reduction of supplies coming from Florida is a sign of supply and demand tightness. While Florida has been the leading U.S. orange-producing state, California is likely to surpass Florida in output during the 2022-2023 harvest. 

There are no alternatives to the futures

In four of the five soft commodities on ICE, ETF or ETN products reflect the price action in the futures market:

• Sugar- The SGG ETN and CANE ETF products track the world sugar futures contract.
• Coffee- The JO ETN moves higher and lower with the Arabica coffee bean futures.
• Cocoa- The NIB ETN reflects the price action in the cocoa futures arena. 
• Cotton- The BAL ETN tracks cotton futures prices. 

The low liquidity in the FCOJ futures arena has prevented the introduction of FCOJ ETF or ETN products that move with the futures contract. The only choice for those looking to participate in the FCOJ market is via the futures. 

The support and resistance levels for the dangerous FCOJ futures market

Anyone dipping a toe into the FCOJ on the long or short side must account for the low liquidity that could lead to market moves with no opportunity to liquidate a risk position. 

From a medium-term perspective, FCOJ established a new upside target and technical resistance level at $2.6695 per pound. 

The chart shows the current support level at the mid-November 2022 $1.9470 low.

Markets tend to rise and fall to prices that defy logic, rational analysis, and reason during market moves, and low liquidity only exacerbates those moves. When market participants find themselves on the wrong side of a move in an illiquid market, the results can be ugly, as those holding short positions in the March FCOJ market found out from January 31 through February 9, when the price exploded from $2.09 to $2.6695 per pound. Be careful when approaching FCOJ or any other illiquid markets. If you are determined to participate, make sure the position size is small enough to tolerate the potential price swings. 

As of February 20, 2023, FCOJ futures corrected, but the medium-term trend remains bullish despite the implosion from the most recent high.  

• Cotton Closes Week with 4c Loss
• Coffee Prices Rally Sharply on Forecasts for Heavy Rain in Brazil
• Sugar Prices Edge Higher as India Decides not to Boost Sugar Exports
• Cocoa Prices Push Higher on Global Supply Concerns