🍊 Your Guide To Investing In Orange Juice. Yup, It’s Also A Financial Asset

Brief Background

That’s right, orange juice is also a financial asset! More specifically, it’s FCOJ (frozen concentrated orange juice) that’s used as a benchmark for orange juice prices since it’s easier & more economical to store & ship. There are actually a number of different orange varieties, but the Valencia orange is the most popular variety for juicing. To make FCOJ, in short, they juice the orange, then heat the juice & evaporate the water, and then freeze the remaining concentrate. When it gets sent to a juice processor, they just mix the concentrate with water or fresh juice and then pack it up to be sold in supermarkets.

What Can It Do For You

🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Bundling OJ with a number of other commodities to your portfolio can be a good way to diversify your portfolio since it acts differently to other asset classes.

💰 Profit. OJ is pretty volatile as you can see from the price chart below, and it also tends to be pretty seasonal, so it’s possible to gain decent speculative returns. You may want to consider investing in OJ (at least for the long term) for a number of reasons, including: the impact of global warming/climate change on supply & an increasing emerging market demand, particularly from Brazil, China & Russia. Of course, there will be other factors at play that can lower prices, which results in the volatile & cyclical price swings, presenting multiple short term speculative opportunities.

Price chart of the FCOJ futures contract over the years.

What Affects FCOJ Prices

The FCOJ market is known to be pretty volatile. There are several key factors that are involved in moving the price of OJ:

• 🇧🇷🇺🇸 Supply. Brazil accounts for a staggering ~62% of the world’s supply of FCOJ. Second place goes to the US (or rather, the state of Florida), accounting for ~15%. As you can see, supply disruptions in Brazil (due to e.g. political instability like corruption, etc.) can definitely impact OJ prices.
• 🇪🇺🇺🇸 Western Demand. European Union countries & the US are the two biggest consumers of OJ, but demand has been declining over the years. Might be due to a number of reasons, but it’s been suggested that the naturally high sugar levels in OJ, as well as the declining number of people who have breakfast in the number, have played a part. Recently however, recent reports have come out that demand has increased during the pandemic due to consumers buying immune-enhancing products to keep them healthy.
• 🇨🇳🇧🇷 Emerging Market Demand. OJ consumption in emerging markets (especially China & Brazil) has grown steadily over the years. This may be due to growing economic wealth & an increasing appreciation of western food & drinks products. Nevertheless, increasing demand from these countries can certainly impact OJ prices
• 🦠 Diseases. In relatively recent years, both Brazil & US orange trees have been affected with diseases that kill them. Solutions that can prevent these diseases (or at least keep them at bay) should also prevent supply shocks, and therefore price swings. Alternatively, if there is indeed another serious outbreak, it could certainly devastate supply, pushing prices higher.
• 🌧️ Weather. Arguably one of the most important factors in influencing OJ prices. Specific weather conditions must be met in order for OJ plants to thrive (they’re really picky…). Hurricane season or freezing winters in Florida or extended droughts in Brazil can and have impacted supply, and therefore affected its price.
• 🏥 Health Trends/Research. This one’s a bit conflicting. On one hand, you have influencers and celebrities that are promoting juice trends & detoxifiers, driving demand. On the other, more and more research are suggesting that juices have high levels of sugar (albeit natural) that may be linked to diabetes, obesity & tooth decay, driving down demand for the more health-conscious consumers. It seems the pandemic has shifted this perspective entirely, with reports suggesting that more consumers are buying OJ in an effort to boost their immune-system.
• 🏛️ Regulatory Policies. In 2012, the FDA (Food Drug Administration) in the US banned orange juice imports from Brazil because of the presence of a banned fungicide used to protect oranges from mould. At the time, Brazil accounted for roughly half of all US juice imports. As you can imagine, this significantly drove up OJ’s price. Any other policies that might restrict supply will certainly affect prices.

(Source: Foreign Agricultural Service/USDA)

The Case Against FCOJ

Like some of the other soft commodities, the FCOJ market is extremely volatile, which may make it hard for short-term objectives. Demand has been declining over the past few years in the top consumer countries, but reports have suggested an increase in demand due to the pandemic. Only time will tell if this is only temporary or is reflective of a sudden shift in perspective. Additional research that highlights the harms of OJ’s naturally high sugary content may potentially continue the declining demand.

The Case For FCOJ

For the long-term, global warming & climate change can certainly affect ideal weather conditions that orange groves need to survive, which may impact OJ production. Extreme weather patterns in Florida & extended periods of drought in Brazil can lead to a very restricted supply. In fact, in recent years, apart from two anomalous years, supply levels have been low. Furthermore, there are still lethal diseases that affect both Brazil & US oranges. Time will tell if research into a solution or a more disease-resistant variety comes to fruition.

Popular Ways To Invest In FCOJ — Pros/Cons of Each

Unlike other commodities, you’re pretty limited in how you can invest in OJ. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.

• FCOJ ETNs. You’re pretty limited here, but you can invest in ETNs that hold a bunch of commodities, including OJ (remember, ETNs don’t buy the assets, but instead, follows price indexes & pays its shareholders on returns). They’re traded on stock exchanges, so they’re very easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Remember that ETNs have unique associated risks since they’re not dealing with the actual assets. Just be sure to read the fine print.
• FCOJ Stocks. So there isn’t really any way to invest in pure OJ companies since they’re either privately owned or is a subsidiary of a larger parent company. You could instead look at these larger parent companies that own popular orange juice brands & invest in them. However, since the parent company will most likely have dozens if not hundreds of other products, share prices may not necessarily reflect FCOJ prices. As always, you may want to consider looking at the company’s annual reports (especially operational costs), the subsidiaries they have, and how big their OJ subsidiary brands are in their portfolios.
• FCOJ Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell OJ at a specified time in the future with an agreed-upon price. These futures contracts can be settled with physical delivery or with cash after the contracts have expired. The minimum contract size is 15,000 pound of OJ! Because you are using a significant amount of borrowed money, even small price changes in OJ can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.

TL;DR — Is It The Right Investment For You?

As always, it depends on what your aims are. FCOJ is an extremely volatile & relatively illiquid market, driven by fundamental, technical & seasonal factors. This means that there may be cases where the order you which presents opportunities for speculative profit for more aggressive investors. Like other commodities, OJ can bundled up with a number of other commodities to diversify your portfolio & to protect against inflation and a weak dollar. In the short term, prices tend to fluctuate seasonally since there are no harvests during off-peak periods like winter. In the long term, a number of trends suggests favourable market conditions that could increase OJ prices.

🧺 If you are considering bundling up OJ with a number of other commodities to your existing portfolio, you may want to consider doing dollar-cost averaging (regular investments over time) to build your OJ position so you can take advantage of the volatility in the market.

💰 If you are considering adding OJ for speculation and profit, you may want to monitor the factors that affect OJ prices mentioned above, especially orange production in Brazil & Florida in the US (as well as the impact of weather/climate change). The US Department of Agriculture (USDA) releases monthly forecasts on Valencia orange production in the US, as well as a biannual report published every January & July on global production, consumption & stock levels so you can stay up-to-date with supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on OJ’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can swing unexpectedly due to disruptive events, such as unfavourable weather conditions or a disease outbreak, so be prepared and have an exit plan in place.

As always, if you are unsure, check in with a professional financial advisor before making any moves.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.