For 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.

An 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.

A Changing 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.

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The FCOJ-2 Contract

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:

1. FCOJ-2 specifically calls for Florida/Brazil-only juice. FCOJ-1 has no limitation on country of origin for deliverable juice.
2. 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 specification (FCOJ-1).
3. 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 month.