Spread Betting on Orange Juice (NY)
Oranges are nearly entirely usable fruits and very little of an oranges is wasted – after the juice has been extracted from an orange (which accounts for about 50% of the fruit), you are left with peel, pulp and seeds. The pulp is used as feed for cattle while the oil found in the peel is extracted as citrus essential oil and is used to make flavours and perfume.
Globally, after Brazil, Florida is the world’s second-largest producer of orange juice. In fact, Florida is where most of the orange juice in the USA is grown with more than 80 million citrus trees planted in 575,000 acres of citrus groves – having been cultivated commercially in the state since the mid-1800s. Production peaked in the first years of the 2000’s but has now dropped off drastically since the hurricanes of 2004 and 2005. In contrast with the apple juice consumed in the U.S., most of which is imported from China. America’s orange juice is made from over 75% Florida oranges. Most of the produce (around 90%) is turned into canned, chilled or frozen concentrated juices.
And, since Brazil produces when the U.S doesn’t, and vice versa, together they constitute a year-round market. In contrast to the USA Brazil consumes little of its own juice and exports the rest – no orange juice is imported in Brazil. Brazil is not only one of the biggest exporters to Europe but is also one of the main suppliers to China.
Spread Betting Orange Juice
FCOJ futures were launched on the New York Board of Trade (now known as ICE Futures US) in 1966, with options on such futures following in 1985. The standard FCOJ contract is for 15,000 lbs of orange solids (3% more or less) with settlement by physical delivery in either tanks or drums.
The liquidity in orange juice futures is fair and the market is very nearly a pure ‘weather play’. Volatility is greatest in both the freeze and hurricane seasons in winter and fall and is lowest in April through June. Being highly dependent on the weather, orange futures prices will go up a few days before a perceived weather threat is expected to manifest itself. Futures will then fall steeply should it appear that the damage is little or if the threat doesn’t actually materialize.
Other factors affecting the FCOJ futures are: foreign levels of production of FCOJ, potential diseases reports affecting citrus (for instance Citrus Canker, CVC, Sudden Death Disease and Greening), the strength of the USA dollar and processing capacity.
Please note that Orange Juice futures are a very volatile market like coffee and cocoa – and although spread betting providers like City Index provide you with the ability to take smaller positions than are possible in the underlying futures contracts you should be aware of the risks. Prices can remain static for relatively long periods but can suddenly make dramatic moves – for instance coffee, cocoa and orange juice are all capable of doubling or halving in price over a short-time period.
To bet or not to bet: limiting factors
If you have ever watched the film Trading Places (which stars Eddie Murphy and Dan Aykroyd and is arguably the best film ever to feature commodities) and have always wanted to trade pork bellies or frozen concentrated orange juice futures just like they do in the movie, you can do just that thanks to the spread betting providers out there.
Although there are an impressive number of commodities bets out there, whether or not you can actually bet on a specific commodity will depend on a number of factors. For a start, certain spread betting companies simply will not be able to offer clients bets on certain markets as they do not have permission from the relevant exchanges to quote prices. So if you believe that you can follow in the (fictional) footsteps of Trading Places’ protagonists Winthorpe and Valentine – played by Aykroyd and Murphy respectively – and make a killing by betting on the orange juice market, a look at the spread betting providers shows that only a handful of spread betting companies will be able to take your bets.
Curiously enough, Winthrope and Valentine made their money by betting that orange juice prices would go through the roof due to poor supplies. That seems to be happening in real life, as orange juice prices last week hit a 16-year high thanks to poor crop results.
Another thing to bear in mind is that with certain spread betting companies – such as City Index, Selftrade and IG Markets – the range of markets you can bet on will depend on what type of account you have.
For example, clients who have ordinary accounts with City Index will be able to trade on more than 20 different commodities and dozens of different commodities contracts. However, clients with limited-risk accounts – where stop losses are automatically put on every trade – will find that they are limited to three commodities – gold, silver and oi.
Additionally, the amount traders can bet using limited-risk accounts is capped. If you have an ordinary account with City Index, you could bet up to £500 a point on gold, say. With a limited-risk account, the most you will ever be allowed to bet is £25 a point.
The other thing to note is that, if you want to trade using a limited risk account, pound for pound it may very well cost you more. For example, the spreads on all commodity bets available using IG’s controlled-risk account – which is similar to the limited risk accounts offered by City Index and Selftrade – are higher than the ones available to those who have ordinary accounts with the financial book maker. If you have a controlled-risk account with IG and want to bet on the price of NYMEX-traded crude oil futures. IG quotes a spread of 12 for controlled-risk account users; for ordinary account holders, the spread on the same contract is just eight.
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