over a century, the world markets of the New York Board of Trade
(NYBOT) have provided effective risk management instruments
for key agricultural commodity industries. NYBOT carefully monitors
its futures and options markets to ensure that they accurately
reflect cash market realities. In response to an evolving citrus
marketplace, NYBOT now offers a new hedging capability for industry
participants who must protect their bottom line from the basis
risk posed by the variable premium paid for Florida/Brazil juice.
Expanding Citrus Futures Market
The New York Board of Trade's Citrus Associates subsidiary
now offers the citrus industry a new risk management capability
utilizing a second frozen concentrated orange juice futures
contract (FCOJ-2).* The new FCOJ-2 contract, which calls for
delivery of juice from Florida, Brazil or blends thereof, allows
industry participants to directly hedge price risk associated
with making or taking delivery of Florida/Brazil-only juice.
Since 1966, the citrus industry has relied on FCOJ futures (and
options since 1985) as primary hedging tools. The existing frozen
concentrated orange juice contract (FCOJ-1) does not limit the
deliverable juice to any specific country of origin.
The FCOJ-2 contract is traded, however, in a differential
combination with the FCOJ-1 contract (for all but a day-and-a
half of the FCOJ-2 contract's life). The FCOJ Differential Contract
represents the price difference between the FCOJ-2 (Florida/Brazil
only) and the FCOJ-1 (a variety of sources) contracts. Historically,
Florida/Brazil has always traded in the cash market at a premium
to the FCOJ-1 nearby contract price.
Citrus Cash Market
In line with U.S. import demands and labeling standards,
the citrus industry has encountered a growing need to take delivery
of juice that is 100% Florida, 100% Brazil or a blend of both.
To meet this need, the industry has consistently been willing
to pay a premium for Florida/Brazil-only product. The price
of the current FCOJ-1 contract reflects the cash market price
of juice with no specific origin. Since most cash market transactions
now include country of origin specifications, the prevailing
cash market price for Florida/Brazil product has diverged from
the futures price for FCOJ-1.
In the past year, the futures price for the current FCOJ-1
contract experienced a 30 cent range while the premium for cash
Florida/Brazil-only juice has traded at levels from 4 cents
to 20 cents above the futures price. This represents a dramatic
change in the basis price relationship between the futures market
and the specific cash market product. With the increased basis
risk, customers hedging their portfolios of Florida/Brazil product
with FCOJ-1 contracts had an inefficient hedging mechanism.
The two FCOJ contracts are identical in most specifications
-- trading unit, trading hours, trading months, price quote,
point value, delivery point, first notice day, last notice day,
last delivery day and delivery methods.
The new FCOJ-2 contract differs from the FCOJ-1 contract
in three ways:
- FCOJ-2 specifically calls for
Florida/Brazil-only juice. FCOJ-1 has no limitation on country
of origin for deliverable juice.
- Unlike the FCOJ-1 contract,
the FCOJ-2 does not trade by itself for most of its life.
Up until two days before the first notice of delivery day,
the FCOJ-2 contract trades only in combination with the existing
FCOJ-1 contract in an FCOJ Differential Futures Contract.
The new market therefore trades the price difference between
Florida/Brazil-only juice (FCOJ-2) and juice without country
- The two contracts have a different
last trading day. The expiring FCOJ-2 contract month ceases
to trade at 12:00 noon on the first notice of delivery day
for the contract. For FCOJ-2, the last trading day continues
to be the 15th last business day of the expiring contract