• TABLE OF CONTENTS
HIDE
 Copyright
 Title Page
 Acknowledgement
 Table of Contents
 List of Tables
 List of Figures
 Introduction
 Characteristics of futures...
 Characteristics of the Florida...
 Possible units of trading in Florida...
 Development of interest in futures...
 How futures trading might operate...
 Conclusion
 Summary
 Appendix
 Reference






Group Title: Agricultural economic mimeo report - Department of Agricultural Economics, University of Florida - EC 66-6
Title: Futures trading and the Florida orange industry, by B.A. Dominick, Jr. and F.W. Williams
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Permanent Link: http://ufdc.ufl.edu/UF00071977/00001
 Material Information
Title: Futures trading and the Florida orange industry, by B.A. Dominick, Jr. and F.W. Williams
Series Title: Agricultural economic mimeo report - Florida Agricultural Experiment Station ; 66-6
Physical Description: vi, 79 p., : fig., tables, ; 28 cm.
Language: English
Creator: Dominick, B. A.
Williams, F. W
Publisher: University of Florida, Agricultural Experiment Stations
Place of Publication: Gainesville Fla
Publication Date: 1965
 Subjects
Genre: non-fiction   ( marcgt )
 Notes
General Note: December, 1965.
Funding: Florida Historical Agriculture and Rural Life
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Bibliographic ID: UF00071977
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: Florida Agricultural Experiment Station, Florida Cooperative Extension Service, Florida Department of Agriculture and Consumer Services, and the Engineering and Industrial Experiment Station; Institute for Food and Agricultural Services (IFAS), University of Florida
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Resource Identifier: oclc - 28747235

Table of Contents
    Copyright
        Copyright
    Title Page
        Page i
    Acknowledgement
        Page ii
    Table of Contents
        Page iii
        Page iv
    List of Tables
        Page v
    List of Figures
        Page vi
    Introduction
        Page 1
        Page 2
    Characteristics of futures markets
        Page 3
        Page 4
        Page 5
        Development of trading in futures
            Page 3
        The role of futures exchanges
            Page 6
            Page 7
            Types of traders
                Page 8
                Page 9
                Page 10
                Page 11
                Page 12
                Page 13
            Trading examples
                Page 14
                Page 15
                Page 16
                Page 17
                Page 18
                Page 19
                Page 20
                Page 21
                Page 22
        Importance of futures trading
            Page 23
            Page 24
        Requirements for successful futures trading
            Page 25
            Page 26
        Effects of futures trading on prices
            Page 27
            Page 28
            Page 29
    Characteristics of the Florida orange industry
        Page 30
        Page 31
        Page 32
        Producing sector
            Page 30
            Production trends
                Page 30
            Price variability
                Page 33
                Page 34
            Utilization of the crop
                Page 35
                Page 36
                Page 37
            The nature of production expenses and receipts
                Page 38
                Page 39
            Organization for marketing
                Page 40
                Page 41
        Processor level
            Page 42
            Procurement and distribution pattern
                Page 42
            Price variability of frozen orange concentrate
                Page 42
                Page 43
                Page 44
                Page 45
                Page 46
            Changes in type of pack
                Page 47
                Page 48
                Page 49
    Possible units of trading in Florida fresh oranges and/or concentrate
        Page 50
        Page 51
    Development of interest in futures trading in the orange industry
        Page 52
        Page 53
        Previous research
            Page 54
            Page 55
            Page 56
            Page 57
        Changes in the industry
            Page 58
            Page 59
            Page 60
    How futures trading might operate in the orange industry
        Page 61
        The citrus grower
            Page 62
        The speculative citrus trader
            Page 63
        The citrus processor
            Page 64
            Page 65
    Conclusion
        Page 66
        Fresh valencia oranges
            Page 66
            Factors conducive to the development of futures trading
                Page 66
            Factors likely to impede the development of futures trading
                Page 67
        Frozen orange concentrate
            Page 67
            Factors conducive to the development of futures trading
                Page 67
            Factors likely to impede the development of futures trading
                Page 68
    Summary
        Page 69
        Page 70
        Page 71
        Page 72
    Appendix
        Page 73
        Page 74
        Page 75
        Page 76
    Reference
        Page 77
        Page 78
        Page 79
Full Text





HISTORIC NOTE


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida





KLJwo~L
tr~ o%-a


Agricultural Economics Mimeo Report EC 66-6
December 1965


FUTURES TRADING

and the

FLORIDA

ORANGE INDUSTRY


B. A. Dominick, Jr.
and
F. W. Williams






Department of Agricultural Economics
Florida Agricultural Experiment Stations
Gainesville, Florida
in cooperation with
Economic Research Department
Florida Citrus Commission
Lakeland, Florida












ACKNOWLEDGMENTS


The authors express appreciation to Professors C. D.

Covey, R. A. Eastwood, W. K. McPherson and Leo Polopolus,

Department of Agricultural Economics, University of Florida,

and to Dr. H. G. Hamilton, Professor Emeritus of that Depart-

ment, for their constructive comments on an early draft of

this report. Dr. R. G. Stout and Mr. H. W. Schwarz, Minute

Maid Corporation, also provided helpful comments. Complete

responsibility for content of the final publication rests

with the authors.











TABLE OF CONTENTS


Page


ACKNOWLEDGMENTS ii

LIST OF TABLES v

LIST OF FIGURES vi

INTRODUCTION 1

CHARACTERISTICS OF FUTURES MARKETS 3

Development of Trading in Futures 3
The Role of Futures Exchanges 6
Types of traders 8
Trading examples 14
Importance of Futures Trading 23
Requirements for Successful Futures Trading 25
Effects of Futures Trading on Prices 27

CHARACTERISTICS OF THE FLORIDA ORANGE INDUSTRY 30

Producing Sector 30
Production trends 30
Price variability 33
Utilization of the crop 35
The nature of production expenses and receipts 38
Organization for marketing 40
Processor Level 42
Procurement and distribution pattern 42
Price variability of frozen orange concentrate 42
Changes in type of pack 47

POSSIBLE UNITS OF TRADING IN FLORIDA FRESH ORANGES AND/OR
CONCENTRATE 50

DEVELOPMENT OF INTEREST IN FUTURES TRADING IN THE ORANGE
INDUSTRY 52

Previous Research 54
Changes in the Industry 58

HOW FUTURES TRADING MIGHT OPERATE IN THE ORANGE INDUSTRY 61

The Citrus Grower 62
The Speculative Citrus Trader 63
The Citrus Processor 64


- iii -








TABLE OF CONTENTS--continued


CONCLUSIONS


Fresh Valencia Oranges
Factors conducive to the
Factors likely to impede
Frozen Orange Concentrate
Factors conducive to the
Factors likely to impede


development of futures trading
the development of futures trading

development of futures trading
the development of futures trading


SUMMARY

APPENDIX

REFERENCES


- iv -












LIST OF TABLES


Table Page

1 Maine Potato Futures: Occupational Distribution of Traders,
by Number and Class of Trader, New York Mercantile Exchange,
December 31, 1964 12

2 Estimated Number of Transactions and Value of Futures Trading,
All Contract Markets Combined, in Commodities Under the
Commodity Exchange Act, Fiscal Years Ended June 30, 1964,
and June 30, 1965 24

3 First-of-Month Estimates of Production of Oranges, Florida,
1954-55 through 1964-65 33

4 Estimated Monthly Average On-tree Prices to Growers for
Oranges for Frozen Orange Concentrate, Florida, 1954-1964
Seasons 36

5 Pricing Arrangements for Florida Oranges Used for Frozen
Concentrate, 1960-61 through 1964-65 Seasons 41

6 Average Monthly Wholesale Prices of Frozen Concentrated
Orange Juice, Florida, 1954-55 through 1964-65 Seasons 44

7 Average Monthly Retail Prices of Florida Frozen Concentrated
Orange Juice, United States, 1954-55 through 1964-65
Seasons 46

8 Average Annual Retail Prices, Wholesale Price Quotations,
and Wholesale-Retail Margins of Frozen Concentrated
Orange Juice, 1954-55 through 1963-64 Seasons 47

9 Total Pack and Movement of Frozen Orange Concentrate and
Amount Packed and Moved as Bulk and Reprocessed into
Frozen Concentrate, Florida, 1952-53 through 1964-65 49











LIST OF FIGURES


Figure Pae

1 Total Production of Oranges in Florida, 1935-36 through
1965-66 Seasons 31

2 Season Average On-tree Price to Growers for Oranges Used
for Frozen Orange Concentrate, Florida, 1954-55 through
1964-65 Seasons 34

3 Total Oranges Sold and Amount Used for Frozen Concentrated
Orange Juice, Florida, 1935-36 through 1964-65 Seasons 37

4 Monthly Expenses in the Production of Oranges and Total Farm
Dollar Receipts from Oranges Used in Frozen Orange Concen-
trate, Florida 39

5 Monthly Receipts of Oranges at Concentrating Plants and
Monthly Processor Shipments of Frozen Orange Concentrate, 43
Florida


- vi -












FUTURES TRADING AND THE FLORIDA ORANGE INDUSTRY

B. A. Dominick, Jr., and F. W. Williams*



INTRODUCTION

Members of the orange industry in Florida have been studying

and discussing the use of futures trading in the marketing of their

products since the early 1950's. A number of formal talks have been

given on the subject at industry meetings. During this time, at

least two formal research projects have been conducted and reports

made available to the industry. More recently, the Concentrate

Futures Study Committee of Florida Citrus Mutual was appointed to

determine if the citrus industry would benefit from a futures market.

Members of this committee stated in November 1964 that even though

a recent research report pointed out some beneficial ways a futures

market would help the citrus industry, futures trading should be

looked at very closely. It was also stated that there was a feeling

that a futures market might help eliminate market peaks and valleys,

lend more stability, offer a more fluid market, and might be looked

at as a form of price insurance. Also they indicated that consider-

ation must be given to some way to smooth the transition period from

one crop year to another and an educational program was much needed

for grower interest in futures.



*Dr. Dominick is Professor of Marketing, Department of Agri-
cultural Economics, University of Florida on sabbatical leave from
Cornell University, Ithaca, New York. Dr. Williams is Research Econ-
omist, Florida Citrus Commission and Associate Economist, Florida
Agricultural Experiment Stations, University of Floridai Gainesville,
Florida.










In this report the development of futures trading is reviewed,

and the general product and market characteristics necessary for suc-

cessful futures trading are described. The organization and operation

of the growing and processing sectors of the Florida orange industry

are described briefly. How futures trading might operate in Florida

oranges and/or orange concentrate is examined. This information should

be of value to members of the industry in deciding whether the neces-

sary conditions exist for this type of market mechanism, and whether

they have a need for and want such a marketing device.

This report is necessarily subjective in nature. Much of the

history of the development of futures trading has defied quantitative

analysis. The evolution and operation of futures trading on organized

exchanges in the United States has not been a peaceful process.

Throughout their history these instruments of marketing have been quite

controversial. This situation prompted one analyst to state, "Futures

trading in agricultural commodities is a major factor in the marketing

of these products and yet it is the least understood and often the
most condemned part of the entire marketing system.
most condemned part of the entire marketing system." The debate over

the value of futures trading has continued in recent years. Futures

trading has been initiated in several commodities, but onions have

been eliminated from the list of commodities in which trading can take

place. A great deal of effort has been expended to have another com-

modity --potatoes-- removed from active trading.


1
Harold S. Irwin, Evolution of Futures Trading, Madison,
Wisconsin: Mimir Publishers, Inc., 1954, p. vii.















CHARACTERISTICS OF FUTURES MARKETS


Development of Trading in Futures

In this country, contracts to buy or sell goods for future

delivery were used for some time before organized futures exchanges

came into existence. These instruments were called "time" or "to

arrive" contractsV Some writers distinguish between the two, but

each could have been the forerunner of the modern futures contract.

These contracts were usually satisfied by physical delivery of the

commodity. An excellent description of the evolutionary process

has been provided by Irwin:

In each instance analysis shows that futures trading,
unorganized or organized, developed gradually, evidently
to meet specific marketing needs. In eggs and butter
such needs clearly arose from the added problems which
resulted from the accumulation of seasonal surpluses by
dealers. In cotton and grain the same conclusion seems
to be warranted although the evidence is less complete.
In each instance the time contracts which preceded or-
ganized trading arose in response to marketing needs,
developed over a period of years as the commodity market
grew in size and complexity, and ripened into organized
trading in futures. In each instance the organized
trading then showed considerable evolution before reach-
ing its full stature.2 /

Another author stated:

forward trading in Maine potatoes developed in
response to a combination of circumstances. Important
among these was the need for short-term capital and for
means for reducing the extent of price and market uncer-
tainty confronting growers.3

2
Ibid., p. 5.
3
William T. Wesson, The Economic Importance of Futures
Trading in Potatoes, Agricultural Marketing Service, Marketing
Research Division, U. S. Department of Agriculture, Marketing
Research Report 241, June 1958, p. 6.








The early time (forward) contracts were either verbal or

informal memoranda kept by each party specifying the quantity, price

and time of delivery." In some contracts the proportion of the price

to be paid in cash was given. Later, as volume of trading required,

contracts were standardized in printed form, impersonal, more specific

as to quantity, grade, and time of delivery, and were negotiable.

Trading in these contracts involved many changes before developing
4
into futures contracts as they are known today.

Time contracts calling for the delivery of a seasonally pro-

duced commodity facilitated trade greatly by reducing price risks and

making possible financing on more favorable terms. However, the value

of such transfers was reduced sharply by the uncertainty of fulfillment

during times of violent price changes when protection against risks was

most critical." The first regulation dealing with time contracts in

grain on the Chicago Board of Trade was in May 1865.' The regulation

provided that margins not to exceed 10 percent of the value of the com-

modity specified in the contracts might be demanded by either party.

This rule was much like the first one adopted in
connection with time contracts by the Chicago Butter
and Egg Board about 45 years later, approximately 10
years before the beginning of organized trading in
butter and egg futures.5

In studying the evolution of futures trading, one is impressed

with the time required to move from trading in time or forward contracts

to organized trading in futures. Irwin states that for grain and cotton

this involved about 20-25 years.6 A longer period of time was required



Irwin, op. cit., pp. 78-79.

5Ibid., pp. 80-81.

6bid., p. 69.









for butter and eggs half a century later. Organized trading in grains

began in about 1865, although the Chicago Board of Trade was formed in

1848. In cotton it began in the early 1870's with the formation of

the New York Cotton Exchange. Organized trading in butter and eggs

began in 1919 with the formation of the Chicago Mercantile Exchange,

although efforts to control trading in time contracts of these com-

modities were made around 1900 by the New York Mercantile Exchange.

The evolution of futures trading in potatoes followed the same general

pattern as other commodities. Cash forward contracts between growers

and buyers of Maine potatoes began to develop in the 1870's. This

method of trading continued until the beginning of organized futures

trading on the New York Mercantile Exchange in 1941.

The contracts traded on organized exchanges today are commonly

referred to as futures contracts or "futures". A futures contract is

one under which the seller agrees to sell and the buyer agrees .to pur-

chase given quantities of a commodity at a stated price for delivery

during some stated later month, all subject to the rules of the par-

ticular exchange where the commodity is traded.u/Delivery may be at

any time during the month at the option of the seller./ Most generally,

a certain grade of product is specified as the contract grade and the

price is for that grade. Other grades which can be delivered at

premiums or discounts are determined by the exchange. ,















CHARACTERISTICS OF FUTURES MARKETS


Development of Trading in Futures

In this country, contracts to buy or sell goods for future

delivery were used for some time before organized futures exchanges

came into existence. These instruments were called "time" or "to

arrive" contractsV Some writers distinguish between the two, but

each could have been the forerunner of the modern futures contract.

These contracts were usually satisfied by physical delivery of the

commodity. An excellent description of the evolutionary process

has been provided by Irwin:

In each instance analysis shows that futures trading,
unorganized or organized, developed gradually, evidently
to meet specific marketing needs. In eggs and butter
such needs clearly arose from the added problems which
resulted from the accumulation of seasonal surpluses by
dealers. In cotton and grain the same conclusion seems
to be warranted although the evidence is less complete.
In each instance the time contracts which preceded or-
ganized trading arose in response to marketing needs,
developed over a period of years as the commodity market
grew in size and complexity, and ripened into organized
trading in futures. In each instance the organized
trading then showed considerable evolution before reach-
ing its full stature.2 /

Another author stated:

forward trading in Maine potatoes developed in
response to a combination of circumstances. Important
among these was the need for short-term capital and for
means for reducing the extent of price and market uncer-
tainty confronting growers.3

2
Ibid., p. 5.
3
William T. Wesson, The Economic Importance of Futures
Trading in Potatoes, Agricultural Marketing Service, Marketing
Research Division, U. S. Department of Agriculture, Marketing
Research Report 241, June 1958, p. 6.








The Role of Futures Exchanges


Futures contracts are traded on futures, or commodity

exchanges. These exchanges do no trading themselves, but provide

the facilities where trading can take place. A statement included

in the original charter of the Chicago Board of Trade is believed

to be representative of the objectives of modern futures exchanges.

It included the following: maintain a commercial exchange to pro-

mote uniformity in the customs and usages of merchants; to inculcate

principles of justice and equity in trade; to facilitate the speedy

adjustments of business disputes; to acquire and disseminate valuable

commercial and economic information; and generally, to secure for its

members the benefits of cooperation in the furtherance of their legit-

imate pursuits./

Exchanges perform many functions. Opinions vary as to the

importance of each. Certainly among the more important are trans-

ferring legal titles to futures contracts sold and bought, price

discovery and publicizing the prices established. By attracting large

quantities of risk capital to a central location "hedging" is made

possible. An elementary definition of hedging is taking the opposite

position in the futures market that one takes in the cash (spot)

market; then to complete the transaction, the positions are reversed.

Further elaboration and examples of this procedure will be given later

in the report.

Irwin described the functions of futures exchanges:

Examination of the operations of the organized
futures markets reveals that they have come to perform
a number of functions which aid in the marketing of the
commodities traded on these markets. Some of these
functions are highly important. Taken as a whole, they
are so closely interwoven with existing marketing pro-
cesses that they are essential to the present scheme of









marketing. Since they may vary slightly from one
commodity to another wheat may be considered a
representative sample. Trading in wheat futures
contributes to the marketing of wheat in the fol-
lowing ways:

1. It aids in price determination.
2. It assists in the handling of the
heavy after-harvest movement.
3. It makes hedging possible.
4. It provides quotations suitable for
wide dissemination.
5. It permits arbitrage.
6. It promotes the maintenance of price
structure in tributary areas.
7. It provides a continuous market.V
8. It results in some change of ownership
through delivery on futures contracts.
Substantially the same services are rendered in
the marketing of other commodities by the trading in
their respective futures.

Working indicated:

.the traditional main function of markets, trans-
fer of ownership, is not a significant function of a
futures market. In futures markets there is little
buying and selling in the usual sense, with its con-
notation of transfer of ownership. Instead, futures
markets exist chiefly to facilitate the holding of
contracts; the making and offsetting of those con-
tracts, misleadingly called buying and selling,8 is g
only incidental to the main function of such markets.


7
H. S. Irwin, "Legal Status of Trading in Futures," Illinois
Law Review of Northwestern University, Chicago, Illinois: Northwestern
University Press, 1938, Volume XXXII, 1937-38, p. 157.

8
Futures contracts, used chiefly as purely financial rather
than as merchandising contracts, are executed under terms that provide
explicitly for settlement by financial transfer rather than by any
transfer of commodity ownership (though allowing the latter as an al-
ternative means of settlement). If the execution of such contracts
went under an appropriately distinctive name instead of being called
"buying and selling", people would not so often think it a perversion
of sound business practice and that transfer of commodity ownership
occurs only infrequently under those contracts. In fact, it is exces-
sive forcing of settlement by transfer of commodity ownership in con-
nection with corners and squeezes, that is a perversion of the use of
futures contracts, as stated by Holbrook Working in "New Concepts Con-
cerning Futures Markets and Prices," The American Economic Review,
Volume LII, No. 3, June 1962, p. 433.


9bid., p. 433.
Ibid., p. 433.









Some writers have indicated other functions of the modern com-

modity exchange, but it is believed that the major ones have been

examined.

Some exchanges, called contract markets, are those licensed

by the United States Department of Agriculture pursuant to a law orig-

inally enacted in 1922 and amended several times, now known as the

Commodity Exchange Act.v The main purpose in regulating exchanges where

domestically-produced commodities are traded today is to assure that

trading takes place in the public interest., Actually, the Act provides

for the regulation of futures trading by the Secretary of Agriculture,

the Commodity Exchange Authority, and the Exchanges themselves. There

is some misunderstanding concerning the relationship between futures

exchanges and government control. These marketing institutions are not

owned by government, nor are they agents of government as is sometimes

believed. They are self-governing organizations with rules and regu-

lations developed by the members. However, they are under the super-

vision of government to assure their operation for and in the interests

of the public. Supervision of Commodity Exchanges by the Commodity

Exchange Authority closely parallels supervision of common stock markets

by the Securities Exchange Commission.


Types of traders

Two types of traders deal in contracts on futures markets.

Those who buy and sell contracts in an effort to avoid losses resulting

from price changes enter the market for the purpose of hedging.. They

offset an existing risk with an opposite position on another risk they

believe likely to move in the same direction.v Speculators buy and sell

futures contracts to make a profit from price changes. They do not own









the actual commodity and do not want to deliver or accept delivery

on futures contracts/ Successful trading in a commodity on a futures

market depends on active trading by each type of trader. Hedging is

made possible by speculators who buy or sell based upon the way they

think the market may move. At the same time, an effective futures

market depends upon hedging. The mechanics of trading are the same,

regardless of the intentions of those who deal in futures.

Working has challenged these traditional explanations. He

states:

.that hedging is done for a variety of reasons, not
merely to reduce risk. .that futures markets are
viewed much too narrowly when they are regarded as serv-
ing merely to allow transfer of risk from hedgers to
speculators;10
Recognition of the fact that hedging is done for a
variety of purposes requires defining hedging otherwise
than has been customary. For present purposes we
need to define only hedging in futures. All the uses
of futures that are commonly called "hedging" will be
comprised, and all other uses excluded, if we charac-
terize hedging as the use of futures contracts as a
temporary substitute for a merchandising contract that
is to be made later.11

He defines the word "speculation" according to the ordinary usage

of the word and the way it is used in much economic discussion, i.e.,

speculation in commodities may be defined as the
holding of a net long or a net short position, for gain,
and not as a normal incident to operating a producing,
merchandising, or processing business.
Business hedging is done for a variety of reasons
which differ according to circumstances. .

1. Carrying-charge hedging is done in connection
with the holding of commodity stocks for direct
profit from storage (rather than merely to fa-
cilitate the operation of a producing or mer-
chandising business).
S. the main effect of carrying-charge hedging
is to transform the operation from one that seeks


10
Ibid., p. 454.


11
Ibid., p. 442.









profit by anticipating changes in price level
to one that seeks profit from anticipating
changes in price relations. .
Whereas the traditional hedging concept
represents the hedger as thinking in terms of
possible loss from his stockholding being off-
set by gain on the futures contracts held as a
hedge, the carrying-charge hedger thinks rather
in terms of change in the "basis" that is,
change in the spot-future price relation. And
the decision that he makes is not primarily
whether to hedge or not, but whether to store
or not.1

2. Operational hedging is done chiefly to facili-
tate operations involved in a merchandising or
processing business. It normally entails the
placing and "lifting" of hedges in such quick
succession that expectable changes in the spot-
future price relation over the interval can be
largely ignored; and it is this fact which
chiefly distinguishes operational hedging from
carrying-charge hedging. Because the intervals
over which individual operational hedges are
carried tend to be short, the amount of risk
reduction accomplished tends to be small. .

3. Selective hedging is the hedging of commodity
stocks under a practice of hedging or not hedg-
ing according to price expectations. Because
the stocks are hedged when a price decline is
expected, the purpose of the hedging is not
risk avoidance, in the strict sense, but avoid-
ance of loss.
Selective hedging almost inevitably
yields large advantages to any merchandising
or processing firm that is able to anticipate
price changes reasonably well. From an econom-
ic standpoint selective hedging deserves ap-
praisal as simply one aspect of the use of
futures markets as a means by which handlers of
a commodity increase the efficiency of their
participation in the price-forming process, in-
stead of largely withdrawing from such partici-
pation, as they do when they practice routine
carrying-charge or operational hedging. .


12
12In consequence, the term "carrying-charge hedging" tends to
be used sometimes to designate the combined operation of storage and
hedging for profit. In trade usage the combined operation is sometimes
called "earning the carrying charge." It is an operation not properly
divisible into two parts, for without the hedging the storage becomes a
quite different operation, from the business point of view, requiring use
of different information to conduct it successfully, and leading often to
a different choice of the intervals over which storage is undertaken.









4. Anticipatory hedging, which also is ordinarily
guided by price expectations, differs from se-
lective hedging in that the hedging contract is
not matched by either an equivalent stock of
goods or a formal merchandising commitment that
it may be said to offset. It takes either of
two principal forms:
(a) purchase contracts in futures acquired by
processors (or manufacturers) to cover raw
material "requirements";13 or (b) sales con-
tracts in futures by producers, made in advance
of the completion of production. In either of
these forms the anticipatory hedge serves as a
temporary substitute for a merchandising con-
tract that will be made later. In the one case
it serves as a substitute for immediate purchase
of the raw material on a merchandising contract;
in the other case it serves as a substitute for
a forward sale of the specific goods that are in
the course of production. .

5. Pure risk-avoidance hedging, though unimportant
or virtually nonexistent in modern business prac-
tice, may have played a significant part in the
early history of futures markets. .14

An example of the market positions and occupational distri-

bution of the two types of traders in a commodity actively traded in

the futures market is given in Table 1. This may suggest the types

of traders who might participate in a futures market in oranges.

The 1964-65 season produced the largesttrading volume and amount of

hedging in Maine potatoes in the 23-year history of the market. As

of December 31, 1964 there were 3,055 traders in the market and open
15
contracts in all futures combined totalled 19,282 carlots. Of the

total traders, 2,332 --or approximately three-fourths-- were specu-

lators; while 723 --or almost 25 percent of the total-- were actually


13
Such use of futures contracts was first given legal status
as hedging under the Commodity Exchange Act by an amendment enacted
in 1956 (70 Stat. 630).

14
Working, op. cit., pp. 438-442.

15
These are contracts entered into and not yet liquidated by
an offsetting transaction or completed by delivery.










Table l.--Maine Potato Futures: Occupational Distribution of Traders, by Number and Class of Trader, New York Mercantile
Exchange, December 31, 1964


Speculators Hedgers Total
Occupational group No. of Positions No. of Positions No. of Positions
traders Long Short traders Long Short traders Long Short
-------------------------------Carlots--------------------------------------------
Potato industry


Potato growers1
Potato shippers and warehouses
Potato receivers, merchants and jobbers
Cooperatives
Potato processors
Fertilizer dealers, others
Subtotal

Nonindustry
Farmers (other than potato growers)
Brokerage firms and employees
Floor traders and professional
speculators
Employees of potato shippers, receivers
and processors, and others in the
potato trade
Manufacturers, merchandisers, and
wholesalers (other than in potatoes),
capitalists, financiers and bankers
Retailers
Administrative personnel, sales
managers and purchasing agents
Manufacturers' agents and salesmen
Clerical employees, craftsmen, and
service workers
Physicians, lawyers, teachers
engineers, contractors and other
professional occupations
Hlousewives
Retired
Miscellaneoun
Subtotal


396
1,627
867
0
6
25
2,921


120
620
538
0
15
39
1,332


55 1,157


18 123


383
192

144
96

139


515
119
161
128
2,131.


2,763 1,585
710 457


341
217

256


1,904
766
542
266
10,193


217
124

194


879
273
257
136
6,006


412
3,294
1,290
66
1,106
0
6,168


3,024
5,269
1,100
1,619
477
452
11,941


0 0
0 0

0 0


0 0


1 0
1 0

0 0
0 0


0 0 0


808
4,921
2,157
66
1,112
25
9,089


55 1,157


18 123


384
193

144
96

139


515
119
161
128
2,133


3,144
5,889
1,638
1,619
492
491
13,273


344
552

943


45


2,763 1,587
710 458

341 217
217 124

256 194


1,904 879
766 273
542 257
266 136
10,193 6,009


2,332 13,114 7,338


723 6,168 11,944


3,055 19 ,282 19,282


IGrowcr clanilll I ca ion do'es niot incl uld growcr-s:l


ipp(r: wl(h are hereI cI lu 1; fled :1'!) :hil)l l )I) rt.


Source: TrlIading inL Malin Poljilto Fititur(,o, Jimn 1966/)-Fel)rlty 165, U !. DlIpartLimt of AgrilcitulLtur, Coiimmiodl(ty
E lxc;tiige Autitorl y, Wndlington, ). C., p. 24.


Total I


-----


--


-----


--


~ --~--









classified as hedgers. The hedgers as a group were net sellers and

held 11,944 or 62 percent of the short commitments, while the specu-

lators as a group were net buyers. Their long positions of 13,114

carlots were 68 percent of the total long positions.

There were 473 potato growers classified as hedgers and they

had the second largest total of net short hedging positions in the

market. Growers were also directly or indirectly represented in

other industry classifications.

The survey also showed that hedging, as contrasted
to speculative trading, accounted for a greater propor-
tion of the Maine potato futures market on the survey
date than was the case in any other commodity market
surveyed by the CEA in recent years -- including surveys
of such large futures markets as those for wheat, corn,
and soybeans. Potato traders classified as hedgers --
primarily growers, shippers, receivers and processors --
accounted for 62 percent of total short positions in the
market and 32 percent of total long.16

Traders in the non-industry occupations were almost all specu-

lators and they held most of the contracts on the long side of the

market. A wide range of occupations was represented here and all were

net buyers with the exception of brokerage firms and their employees.

















16Trading in Maine Potato Futures, June 1964-February 1965,
Commodity Exchange Authority, U. S. Department of Agriculture,
Washington, D. C., p. 2.









Trading examples

The ownership of a commodity from the time of planting until

it is consumed involves certain risks. The price of it is constantly

subject to change. JThe impact of price changes may be reduced by

trading in futures, provided certain conditions are fulfilled, through

the procedure which has been referred to as hedging. The idea behind

this is that the price of the cash commodity moves up or down with

the futures price of the commodity.: This is because the supply and

demand factors affecting the cash price are largely the same as those

influencing the price of futures contracts., Existing supply and demand

factors determine cash prices, whereas futures prices result from antic-

ipated conditions of supply and demand at some future date.- For hedging

to be effective, cash prices and futures prices must be related. The

difference between the cash price and the price of the futures contract

for a particular month is known as "the basis." Generally, the cash

price is below the price of a particular futures by the price of hold-

ing the cash commodity from that time to the delivery month. As the

delivery month approaches, the basis tends to narrow., If both the cash

and futures prices change in the same direction and the basis declines,

then a selling hedge may provide protection against a price decline

and assure a given level of income.,

How hedging might work can be demonstrated by examples. Fresh

orange contracts are used in the following examples, but the principles

of hedging would be the same with frozen orange concentrate contracts.

Assume that there is a futures contract for Florida Valencia oranges on

the tree, and that a grower can estimate the size of his crop and his

production costs accurately early in the season. He knows the price of









the futures in which he wants to trade. As long as the cash price

moves with the futures prices and he can harvest and sell his entire

crop, he can assure himself of a certain income by hedging. This

holds true whether the prices of oranges or futures contracts for

oranges increase or decrease. The following examples show the proce-

dures and the results, including the timing of the transactions. By

hedging the grower avoids making speculative losses or gains, and

obtains his income from growing and selling his crop.- Hedging then

is a useful mechanism for partially protecting sellers and buyers of

futures contracts from price changes

Example A demonstrates what can happen when the futures price

declines. Example B shows what happens when prices advance. Example

C might occur in the case of a freeze in December, and prices of "spot"

or cash oranges advance sharply, and the grower's crop does not suffer

freeze damage. Example D could occur during a season with a freeze,

and the grower of the hedged crop has serious freeze damage.

If a grower decided to hedge part of his Valencia crop in June,

he could do so by selling one or more futures contracts. This is

called a "selling" or "short" hedges and is done as a protection

against a price decline in the futures contract." If prices decline,

the grower will have a higher return as a result of hedging than with-

out the device.v In Example A, the grower notes in June that the futures

price for the April contract is $1.75 per box. This means those who

want Valencia oranges for delivery the following April are willing to

buy contracts in June for delivery the next April for $1.75 per box.

Others are willing to sell Valencia oranges for delivery the following

April at the same price. The grower hedges by selling 10,000 boxes of









EXAMPLE A

EXAMPLE OF HOW A FARMER MIGHT HEDGE IN AN EFFORT TO ASSURE A GIVEN

RETURN ON HIS VALENCIA ORANGE CROP


WHEN PRICES DECLINE

Transaction


Date


June Grower of Valencia oranges notes

the April futures selling at

$1.75 per box. He calculates his

crop will cost $1.10 per box to

produce. He hedges by selling

10,000 boxes of April futures at

March April futures now $1.50 per box,

and the cash market is $1.40 and

the grower harvests 10,000 boxes.

He sells the 10,000 boxes at -

and buys 10,000 boxes of April

futures at -


RESULTS OF GROWER'S OPERATION ARE:

Cash oranges

10,000 boxes sold at $14,000

Cost to produce 11,000

Profit $ 3,000

NET PROFIT FROM OPERATION -

Had grower not hedged, his net for

the season would have been only


Price
Per Box












$1.75








$1.40



$1.50


Total
Value












$17,500








$14,000



$15,000


Futures

10,000 boxes sold at $17,500

10,000 boxes bought at 15,000

Profit $ 2,500

$5,500


$3,000









futures. How many contracts this will consist of depends upon the

unit of trading decided on by the industry. If the unit of trading

were 2,500 boxes, this would be four contracts. He would do this

through a registered commission or brokerage house similar to trading

in common stocks, The grower at the same time has to put up some

money known as "original or initial margin", as evidence of good

faith and intention to complete his trade/ The person purchasing the

contract would have to do the same thing to guarantee acceptance of

delivery on the contract at a future date./ The amount of margin is

determined by the particular exchange dealing in these contracts.

Buyers and sellers must stand ready to put up additional margin called

"maintenance margin" should the price move against them, or have their

contracts liquidated when their equity is gone.V

The grower sold 10,000 boxes of futures in June for delivery

the following April. In March, one month before the delivery month,

he notes that the April futures price has declined to $1.50 per box

and Valencias on the cash market are selling for $1.40 per box. He

buys back 10,000 boxes of futures at $1.50 per box, making a profit

of $2,500 on this transaction. At the same time, he sells the 10,000

boxes of Valencias he has produced at $1.40 per box for a total of

$14,000. If it costs him $11,000 to produce them, he makes $3,000

from his production operation. His combined net profit is $5,500.

Had the grower not hedged his crop in this case, his profit would have

been only $3,000. He has protected himself against a decline in price

(trading commissions and fees would have to be subtracted from these

net profit figures). In this case, the grower fulfilled his obligation

in the futures market by "offsetting" his original futures position -









a sale -- by buying the same number of contracts. There is another

way in which he could have completed his transaction in the futures

market. He could have waited until April, the contract month, and

delivered 10,000 boxes of his own Valencias to complete the contract.

Total returns would have been $17,500 and his profit would have been

$6,500. Of course, by fulfilling his contract in this manner, he

takes on the added risk of something happening to his crop during

this period.

The primary purpose of a "selling" or short hedge is protec-

tion against a price decline'/ What happens when the price of the

futures contract advances? Example B is an illustration. Again

the grower sells contracts, equivalent to 10,000 boxes, in June for

delivery the following April at $1.75 per box. By the following

March the April futures have increased to $2.00 per box. To complete

his transaction in the futures market, he must buy back the equivalent

of the contracts he sold in June. By so doing, he has a loss in the

futures market of $2,500. He sells his 10,000 boxes, which he grew,

for $19,000. It cost him $11,000 to produce them, so he has an $8,000

profit in the cash market. His combined profit from futures and cash

transactions amounts to $5,500, the same as in Example A. Had he not

hedged his crop, his profit would have been $8,000.









EXAMPLE B

EXAMPLE OF HOW A FARMER MIGHT HEDGE IN AN EFFORT TO ASSURE A GIVEN

RETURN ON HIS VALENCIA ORANGE CROP


WHEN PRICES ADVANCE

Transaction


Date


June Grower of Valencia oranges notes

the April futures selling at

$1.75 per box. He calculates his

crop will cost $1.10 per box to

produce. He hedges by selling

10,000 boxes of April futures at

March April futures now $2.00 per box,

and the cash market is $1.90.

The grower harvests 10,000 boxes.

He sells the 10,000 boxes at -

and buys 10,000 boxes of April

futures at -


RESULTS OF GROWER'S OPERATIONS ARE:

Cash oranges

10,000 boxes sold at $19,000

Cost to produce 11,000

Profit $ 8,000

NET PROFIT FROM OPERATION -

Had grower not hedged, his net for

the season would have been


Price
Per Box












$1.75








$1.90



$2.00


Total
Value












$17,500








$19,000



$20,000


Futures

10,000 boxes sold at

10,000 boxes bought at

Loss -


$5,500



$8,000


$17,500

20,000

$ 2,500










Example C might occur in the case of a freeze in December,

and prices' of spot oranges as well as futures advance sharply. Here

it is assumed that this grower's crop was not injured by the freeze.

Again, an income of $5,500 is assured by hedging. On the other hand,

if his crop had been unhedged, his net profit would have been $28,000.

In these examples it is shown that the grower hedging his crop is ac-

tually eliminating the risk of an adverse change (decline) in the

level of price of the commodity, but has taken on the risk of a change

in the "basis," or the relative change in prices of the physical com-

modity and the futures.,

There can be other cases when an unhedged crop will return

more than a hedged crop. Example D could happen during a season when

a freeze occurs, and the grower of the hedged crop has serious freeze

damage. In this case, it is assumed that the grower loses half of

his crop. Prices advance sharply because of the freeze. By hedging

his crop early in the season and offsetting his contract in March and

selling his oranges, the grower would lose $14,000. By not hedging

his crop, his net income would have been $8,500. This is an example

of what could happen under certain drastic conditions if a grower

stayed with his position. It helps explain why a trader would hedge

only part of his anticipated production in industries where violent

changes in supply are possible.V/









EXAMPLE C

EXAMPLE OF HOW A FARMER MIGHT HEDGE IN AN EFFORT TO ASSURE A GIVEN

RETURN ON HIS VALENCIA ORANGE CROP

WHEN A FREEZE OCCURS AND HIS CROP IS NOT DAMAGED

Date Transaction Price Total
Per Box Value


June Grower of Valencia oranges notes

the April futures selling at

$1.75 per box. He calculates his

crop will cost $1.10 per box to

produce. He hedges by selling

10,000 boxes of April futures at

March April futures now $4.00 per box,

and the cash market is $3.90 and

the grower harvests 10,000 boxes.

He sells the 10,000 boxes at -

and buys 10,000 boxes of April

futures at -


RESULTS OF GROWER'S OPERATIONS ARE:

Cash oranges

10,000 boxes sold at $39,000

Cost to produce 11,000

Profit $28,000

NET PROFIT FROM OPERATION -

Had grower not hedged, his net

profit for the season would

have been -


$1.75








$3.90



$4.00


$17,500








$39,000



$40,000


Futures

10,000 boxes sold at $17,500

10,000 boxes bought at 40,000

Loss $22,500

$5,500


$28,000









EXAMPLE D

EXAMPLE OF HOW A GROWER MIGHT HEDGE IN AN EFFORT TO ASSURE A GIVEN

RETURN ON HIS VALENCIA ORANGE CROP

WHEN A FREEZE OCCURS AND HE LOSES HALF OF HIS CROP

Date Transaction Price Total
Per Box Value


June Grower of Valencia oranges notes

the April futures selling at

$1.75 per box. He calculates his

crop will cost $1.10 per box to

produce. He hedges by selling

10,000 boxes of April futures at

March April futures now $4.00 per box,

and the cash market is $3.90 and

the grower harvests 5,000 boxes.

He sells the 5,000 boxes at -

and buys 10,000 boxes of April

futures at -


$1.75








$3.90



$4.00


$17,500








$19,500



$40,000


RESULTS OF GROWER'S

Cash oranges

5,000 boxes sold at

Cost to produce

Profit -

NET LOSS FROM OPERATE

Had grower not hedge

profit for the season

have been -


OPERATIONS ARE:

Futures

$19,500 10,000 boxes sold at $17,500

11,000 10,000 boxes bought at 40,000

$ 8,500 Loss $22,500

ION $14,000


d, his net

In would


$ 8,500









Importance of Futures Trading

Trading in futures is a well established marketing mech-

anism in the economy and is widely used for some commodities.

According to the United States Department of Agriculture, based

on a report by the Commodity Exchange Authority which regulates

the trading on the contract markets, another all-time record

volume of trading was set during the fiscal year which ended

June 30, 1965. Futures trading in 18 commodities regulated by

the Commodity Exchange Authority amounted to 13.9 million trans-

actions compared with 12.8 million in 1963-64 (Table 2). There

were 10.7 million transactions in 1962-63. The market value of

these transactions was estimated to be almost 75 billion dollars

in 1964-65. The number of transactions varied widely between

commodities. Over half of the total, or 7.8 million, took place

in soybeans. Over one million transactions each were registered

in wheat, corn, potatoes, and soybean oil. No transactions were

recorded for barley and grain sorghums, and less than 500 trans-

actions were tabulated each for flaxseed, rice, wool tops, and

cottonseed meal.









Table 2.--Estimated Number of Transactions and Value of Futures Trading, All Contract Markets
Combined, in Commodities Under the Commodity Exchange Act, Fiscal Years Ended
June 30, 1964, and June 30, 1965

2/
Thousands of Value of trading/
Commodity transactions 1/ (Millions of dollars)
1963-64 1964-65 1963-64 1964-65

Wheat 2,308 1,130 10,643.3 4,210.7
Corn 1,545 1,481 4,469.0 4,644.2
Oats 247 193 415.6 330.5
Rye 293 104 961.4 328.7
Barley 3/ -- .1 --
Flaxseed 2 3/ 2.7 .2
Soybeans 5,946 7,813 37,183.8 56,042.9
Grain Sorghums 3/ -- 1.1 --
Rice 3/ 3/ .2 .1
Cotton 19 4 152.2 32.2
Wool 71 43 298.5 162.6
Wool tops 1 3/ 4.7 1.9
Eggs (Shell) 269 127 695.9 314.9
(Frozen) 119 13 472.7 52.2
Potatoes 357 1,205 273.3 1,490.5
Cottonseed oil 183 56 694.1 223.6
Soybean oil 858 1,133 2,215.8 3,666.4
Cottonseed meal 3/ 3/ .2 .2
Soybean meal 541 604 1,881.0 1,996.6

Total 12,759 13,906 60,365.6 73,498.4

1/Estimated number of purchases plus sales in terms of contract units.


2/Estimated
principal


from monthly volume
markets.


of trading on all contract markets and average prices on


3/
- Less than 500 transactions.


Source: U. S. Department of Agriculture, Reports Record Size Futures Trading in 1965 Flical
Year, Washington, 1). C., July 19, 1965.









Requirements for Successful Futures Trading


The basic requirements for successful trading of commodity

futures have been stated by James S. Schonberg:

In instituting a futures market first there must
be a need for it after the commodity has been in pro-
duction a sufficient length of time to prove its con-
tinuance and acceptance./ A general trade should have
been conducted in an unregulated forward delivery
market, which however is likely to continue despite
the availability of the regulated futures market.
Even though the commodity may have gone through a
manufacturing or conversion process, it should not
be controlled by concentrated interests, either in
its production or uses. It should continue in sur-
plus for a period of time and preferably there should
be a surplus stock at the end of the season, either
in its deliverable form or as the raw material from
which the deliverable quality is derived. If there
are variable qualities of the commodity, several
should qualify for delivery on the contract at normal
commercial price differentials. Dissemination of
quotations is important and adequate trading facili-
ties will aid in the market's development. These two
will quickly follow if the trading rules are wisely
set up.17

implicit in his statement is another often recognized require-

ment: that the product should stand storage for a period of time

without deterioration.N Also implied is that a broad continuous market

is necessary to provide the medium for protection from and speculation

in price changes.

Wesson states in addition:

The methods of buying and selling the commodity in
the cash trade must be standardized to the point where
further standardization necessary in establishing a
futures contract is consistent with trade interest.



17James S. Schonberg, "Historical Evaluation, Theory, and
Legal Status," Chicago Board of Trade, Futures Trading Seminar -
History and Development, Vol. I, (1st ed.; Madison, Wisconsin:
Mimir Publishers, Inc., 1960), p. 35.










There should exist a potential trade interest in the
type of financing afforded by futures trading.18

Some writers feel that products do not have to have all of

the characteristics mentioned to be traded successfully in futures

markets.

Futures contracts have been "tailored" for more
than 40 different commodities representing all degrees
of perishability, homogeneity, variability in demand
and in price, etc., and the end is not yet.
A close examination of this question leads me to
the conclusion that most of the limitations are more
imaginary than real and the fictional ones were based
on too few observations of a technique not yet fully
evolved. These writers gave too much attention to the
physical attributes of the commodity when their atten-
tion should have been riveted on the techniques of
trading.19

Proper product characteristics and marketing environment are

not enough to have futures trading in a given commodity.

A commodity may possess all the inherent character-
istics that make it adaptable for futures trading and
yet be without such a market because of conditions in
the industry or because the trade has not yet come to 20
a full realization of the usefulness of futures trading.,/















18William T. Wesson, Possibilities for Futures Trading in
Florida Citrus Fruit and Products, Agricultural Marketing Service,
Marketing Research Division, U. S. Department of Agriculture in
cooperation with Florida Agricultural Experiment Station, Market-
ing Research Report No. 156, p. 2.

19
1Henry H. Bakken, "Historical Evaluation, Theory, and
Legal Status of Futures Trading in American Agricultural Commodities,"
Chicago Board of Trade, op. cit., pp. 25-26.
20
20Julius B. Baer and Olin G. Saxon, Commodity Exchanges and
Futures Trading, (New York: Harper & Brothers, 1949) p. 120.









Effects of Futures Trading on Prices

Often it has been stated that the primary function of the

futures market is to stabilize prices or reduce price variability.21

There is substantial disagreement on this point. First of all, it is

difficult to demonstrate that variation in price will be reduced by

futures trading. Secondly, there is a question of whether it is

really important from the point of view of effective futures trading

that intra-seasonal price variation be reduced. Trading on the

Exchanges generates prices which reflect effective supply and demand

conditions for the particular commodities. The results of changes in

these conditions are reflected in price fluctuations. Since all the

economic forces affecting price are focused on one location, the

futures market, there may be times when prices will fluctuate more

with futures trading than without it. Some writers have indicated

that, in an active market, prices of some commodities change more often

but not as much as without futures trading.

Data on changes in cash prices and in prices of
futures contracts show that anticipated changes in
the demand-and-supply situation, particularly from
one crop-year to another, were more clearly indica-
ted and were somewhat more accurately discounted in
prices of futures contracts than in prices of the
cash commodity. These data along with other avail-
able information indicate that futures trading
usually tends to lessen the seasonal fluctuation
in prices of grains and to reduce the extent of
price changes from one season to another/ But
futures markets, by facilitating trading, no
doubt increase the frequency of changes in grain



21It has been stated that futures trading was devised to
eliminate wide price swings occasioned by seasonal fluctuations
in supply and demand. It must be pointed out that in eliminating
these swings, the need for futures trading is eliminated.









prices and may at times increase the a Munts of these
changes over relatively short periods.

Price fluctuations are much more closely associated with the

nature of the commodity in question and its supply-demand relation-

ships than with whether or not there is futures trading in the com-

modity. Some have indicated that intra-seasonal price variation

might be reduced in the neighborhood of 10 to 15 percent by futures

trading. When effective supply and demand conditions are accurately

reflected in a broad continuous market, price changes will most likely

be reduced to a minimum. Even though this situation exists, widely

varying prices within a season might be inherent because of the nature

of the product. Whether reductions of 10 to 15 percent would be sig-

nificant in these cases is highly questionable. The point may not be

too meaningful anyway.

Stability of prices cannot be set up as an absolute-
ly desirable end in itself. Freedom of prices to fluc-
tuate as long as they reflect basic changes in supply and
demand and are fully warranted by economic events is, to
my mind, the desirable end. In other words, the discus-
sion of the effect of futures trading on prices should
revolve around the point of whether futures trading allows
or impedes prices in their adjustment to the economic
facts of life. If we say price stability is in itself
the principal aim to be achieved, we are merely seeking
a thermometer that always registers normal, even though
the patient may be ill with a high fever, and recognition
of the illness and remedial action are really the press-
ing requirements.23

What farmers and processors are really concerned with is

variability in income, and this is not necessarily associated with



22L. D. Howell, Analysis of Hedging and Other Operations in
Grain Futures, U. S. Department of Agriculture, Technical Bulletin
No. 971, August 1948, p. 65.

23Richard M. Withrow, "Effects of Futures Trading on Prices,"
Chicago Board of Trade, op. cit., pp. 163-164.









the degree of price fluctuations. The degree of variation in prices

is not the prime consideration. As long as the cash and futures

price move together, a farmer can assure himself a certain level of

income once he knows what the futures price is for the month in

which he wishes to trade, assuming that he knows his production costs

and can bring his crop through to harvest and sale. So, the hedging

procedure helps him reduce his variation in income.- Reduction in

price variability is not necessarily a part of it. These same con-

ditions would help processors hedge against price changes.















CHARACTERISTICS OF THE 'FLORIDA ORANGE INDUSTRY


How well oranges and/or orange concentrate produced in

Florida are adapted to futures trading depends in part on certain

industry characteristics. They can be logically divided into those

relating to the production of the raw product for processing and the

finished product ready for sale. In this section, those character-

istics of each segment of the industry believed to have the most

important bearing on futures trading are presented.


Producing Sector

Production trends

The production of oranges in Florida increased at a relatively

rapid pace from the mid-1930's and reached a peak of 113 million boxes

during the 1961-62 season (Figure 1). Production was reduced in

1957-58 and 1962-63 by freeze damage, but with the rapid rate of re-

covery over 90 million boxes will be produced in 1965-66 according to

the December 1, 1965 estimate. Florida has been the dominant producer

of oranges in the nation since the middle 1940's./ From 1960-61 through

1964-65, Florida produced an average of 73 percent of the total oranges

produced in the United States with a high of 82 percent in 1961-62 and

a low of 63 percent in 1963-64.

Increased plantings of young trees and the increased bearing

surface on older trees recovering from the freeze of December 1962,

combine to offer tremendous potential for increased future production.







Million
Boxes


90


75


60


45


30


15



1935 1940 1945 1950 1955 1960 1965

Figure l.--Total Production of Oranges in Florida, 1935-36 through 1965-66 Seasons1

1965-66 season estimated production as of December 1, 1965.

Source: Florida Agricultural Statistics, Citrus Summary, 1964, Florida Department of Agriculture
and U. S. Department of Agriculture.










Shipments of young trees from nurseries have averaged above 1.8 millicn

annually, except for one season, since 1957-58. According to the

Florida Crop and Livestock Reporting Service of the Florida Department

of Agriculture, 16.5 million of the 43 million round orange trees in

the state have not reached bearing age. This is over 38 percent of

the total number of trees. The number of non-bearing trees has more

than doubled since 1957, a period of seven years.

Monthly estimates of orange production beginning in October

for each season since 1954-55 are shown in Table 3. Estimates change

sharply from month to month in some years. In 1957-58 an estimate of

102 million boxes in October, November and December was reduced to

82.5 million boxes after the extent of the freeze damage had been

assessed. In 1962-63 an estimated crop of 120.5 million boxes was

decreased to 74.5 million in the April production estimate. This is

a greater change than any season-to-season change in more than thirty

years.

Considering only the past eleven seasons, the latest estimates

for these seasons have been more than 5 percent below the October esti-

mates during four seasons, and above the early season estimate by more

than 5 percent during only one season. Early season estimates have

been within plus or minus 5 percent of the latest estimates during

six seasons. During some seasons even small percentage changes in

production estimates have been associated with considerable changes

in average monthly on-tree prices to growers.















CHARACTERISTICS OF THE 'FLORIDA ORANGE INDUSTRY


How well oranges and/or orange concentrate produced in

Florida are adapted to futures trading depends in part on certain

industry characteristics. They can be logically divided into those

relating to the production of the raw product for processing and the

finished product ready for sale. In this section, those character-

istics of each segment of the industry believed to have the most

important bearing on futures trading are presented.


Producing Sector

Production trends

The production of oranges in Florida increased at a relatively

rapid pace from the mid-1930's and reached a peak of 113 million boxes

during the 1961-62 season (Figure 1). Production was reduced in

1957-58 and 1962-63 by freeze damage, but with the rapid rate of re-

covery over 90 million boxes will be produced in 1965-66 according to

the December 1, 1965 estimate. Florida has been the dominant producer

of oranges in the nation since the middle 1940's./ From 1960-61 through

1964-65, Florida produced an average of 73 percent of the total oranges

produced in the United States with a high of 82 percent in 1961-62 and

a low of 63 percent in 1963-64.

Increased plantings of young trees and the increased bearing

surface on older trees recovering from the freeze of December 1962,

combine to offer tremendous potential for increased future production.















CHARACTERISTICS OF THE 'FLORIDA ORANGE INDUSTRY


How well oranges and/or orange concentrate produced in

Florida are adapted to futures trading depends in part on certain

industry characteristics. They can be logically divided into those

relating to the production of the raw product for processing and the

finished product ready for sale. In this section, those character-

istics of each segment of the industry believed to have the most

important bearing on futures trading are presented.


Producing Sector

Production trends

The production of oranges in Florida increased at a relatively

rapid pace from the mid-1930's and reached a peak of 113 million boxes

during the 1961-62 season (Figure 1). Production was reduced in

1957-58 and 1962-63 by freeze damage, but with the rapid rate of re-

covery over 90 million boxes will be produced in 1965-66 according to

the December 1, 1965 estimate. Florida has been the dominant producer

of oranges in the nation since the middle 1940's./ From 1960-61 through

1964-65, Florida produced an average of 73 percent of the total oranges

produced in the United States with a high of 82 percent in 1961-62 and

a low of 63 percent in 1963-64.

Increased plantings of young trees and the increased bearing

surface on older trees recovering from the freeze of December 1962,

combine to offer tremendous potential for increased future production.










Table 3.--First-of-Month Estimates of Production of Oranges, Florida, 1954-55
through 1964-65


Month
Season MonthLatest
Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July
--------------------------------------Million boxes------------------------

1954-55 96.0 96.0 91.0 91.0 89.0 90.5 90.2 89.8 88.8 91.3 88.4

1955-56 91.0 91.0 91.0 91.0 91.0 92.0 91.7 89.7 89.5 90.8 91.0

1956-57 95.0 95.0 95.0 94.0 94.0 94.0 94.0 94.3 94.3 93.3 93.0

1957-58 102.0 102.0 102.0 80.0 85.0 85.0 84.0 84.0 83.0 82.5 82.5

1958-59 85.0 85.0 85.0 85.0 83.0 83.0 82.0 82.1 84.1 86.5 86.0

1959-60 93.0 93.0 93.0 93.0 93.0 93.0 93.0 92.4 92.4 91.5 91.5

1960-61 90.5 90.5 89.5 87.5 87.5 88.5 89.5 88.0 87.5 87.0 86.7

1961-62 99.0 99.0 99.0 99.0 96.0 100.0 101.0 104.0 109.0 113.0 113.4

1962-63 118.7 118.7 120.5 84.5 81.0 77.0 74.5 74.5 74.5 74.5 74.5

1963-64 64.5 64.5 64.5 64.0 65.0 65.2 64.2 63.2 60.8 58.3 58.3

1964-65 83.6 83.6 81.6 81.6 80.6 82.2 85.2 85.2 86.2 86.2 86.2

1965-66 91.3 91.3 91.3 *


*Not published at time report was released.


Source: Florida Crop and Livestock Reporting Service, Florida Citrus (monthly
production forecasts), Orlando, Florida.

Price variability

In addition to changes in estimates of production from month to month and

annual production changes, prices of oranges at each level of production and mar-

keting are subject to variation. Estimates of annual average on-tree prices

received by growers for oranges used in the production of frozen orange concen-

trate are shown in Figure 2. These averages are for priced fruit which includes

spot, contract, bulk and other. For 1964-65, this represented only 29 percent of

all oranges used in the manufacture of frozen concentrate. The proportion













Dollars Per
Box
5


1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964


Figure 2.--Season Average On-tree Price to Growers for Oranges Used for Frozen Orange
Florida, 1954-55 through 1964-65 Seasons1


Concentrate,


Weighted average prices for priced fruit delivered to plants less picking and hauling costs.

Source: Florida Canners Association, Statistical Summary, Season of 1963-1964; and A. HI. Spurlock,
Costs of Picking and Hauling Florida Citrus Fruits, 1963-64 Season, Agr. Econ. Mimco Report


EC 65-6, Fla. Agr. Exp. Sta., Gainesville, Florida, March 1965.










of the total represented by priced oranges has declined in recent

years (see Table 5). Annual averages varied from $1.33 per box

during the 1956-57 season to a high of $4.69 per box during the

1963-64 season. There is a tendency for annual average on-tree

prices to alternate between high and low over the seasons.

On the basis of monthly averages, even greater variability

in prices to growers has existed during these years. Part of this

may be accounted for by orange variety differences, but most of it

is more likely associated with changes in estimates of supply.

Monthly averages for each season beginning in November and ending

in July are shown in Table 4. The greatest changes in prices took

place during the seasons when the greatest changes in production

estimates occurred, namely 1957-58 and 1962-63. During seven of

the eleven seasons, prices during the latter part of the season

were higher than early season prices. Even when the period of April

through July is considered, prices at the end of the season averaged

higher than April averages during five years. They were definitely

lower during only three seasons. These trends have an important

bearing on futures trading.


Utilization of the crop

Until 1947 the major outlet for Florida oranges was the

fresh market. During that season, the volume of oranges used for

processing exceeded the amount used for fresh fruit use for the first

time in history (Figure 3). This occurred in the third season in

which oranges were used for frozen concentrate. The volume sold

fresh exceeded the amount sold for processing in 1948, but during










Table 4.-- Estimated Monthly Average On-tree Prices* to Growers for Oranges
for Frozen Orange Concentrate, Florida, 1954-1964 Seasons



Season Month Season
Nov. Dec. Jan. Feb. Mar. Apr. May June July Average
- - Dollars Per Box - - - - --

1954-55 .94 .96 1.23 1.56 1.61 1.62 1.91 1.94 1.36

1955-56 1.22 1.36 1.70 2.02 1.79 1.94 2.22 2.42 1.89

1956-57 1.30 1.39 1.60 1.62 1.32 1.16 .96 1.24 1.33

1957-58 .91 .92 1.28 2.08 2.19 3.52 4.17 5.20 2.09

1958-59 2.62 2.55 2.57 2.93 3.15 3.06 3.63 3.52 3.05

1959-60 1.53 1.70 2.05 2.31 1.85 2.03 2.17 2.47 2.08

1960-61 2.54 2.21 2.69 3.26 3.35 2.95 3.24 3.34 3.14 2.98

1961-62 1.70 2.00 2.02 2.36 1.92 1.60 1.55 1.23 .96 1.79

1962-63 .61 1.54 2.10 2.49 4.17 5.91 7.03 2.26

1963-64 4.25 4.81 4.95 4.31 4.79 4.94 4.28 4.79 4.69

1964-65 2.83 2.96 2.83 2.46 2.56 2.64 2.49 2.20 2.73


Calculated from average weekly prices of priced fruit weighted by the volume
of fruit delivered to plants. Picking and hauling costs for a given season were
then deducted from each average monthly price. Average picking and hauling costs
for 1964-65 were estimated to be $0.55 per box.

Source: Florida Canners Association and Spurlock, A. H., Costs of Picking
and Hauling Florida Citrus Fruits, 1963-64 Season, Agricultural Economics Mimeo
Report EC 65-6, Florida Agricultural Experiment Station, Gainesville, Florida,
March, 1965.


each season since, processing volume has exceeded the amount used in fresh form.

Presently, 80 percent of the crop goes to market in processed form.

The dominant use of oranges for processing is in frozen orange concentrate.

The industry grew at an extremely rapid pace from 1947 until 1953. A considerably

slower rate of growth followed until the 1961 season, when almost 75 million boxes

-- about 66 percent of the entire state's orange output -- was utilized in frozen

concentrate.








Million
Boxes


45


30


15


0 a I A .*
1935 1940 1945



Figure 3.--Total Oranges Sold and Amount Used
through 1964-65 Seasons


1950 1955 1960 1965



for Frozen Concentrated Orange Juice, Florida, 1935-36


Source: Florida Agricultural Statistics, Citrus Summary, 1964, Florida Department of Agriculture
and U. S. Department of Agriculture; and Florida Canners Association, Statistical Summaries,
Seasons of 1955-1965.











The nature of production expenses and receipts

An understanding of the distribution of dollar inputs in the

production of oranges during the season, as well as the distribution

of income, are important background information to possible futures

trading in the industry, since they indicate to some degree the financ-

ing requirements. The precise distribution of expenses and income will

vary from farm to farm, but an approximation for the industry may be

obtained from aggregative data.

Since most varieties of oranges bloom in March, this month is

considered here to be the beginning of the production year. The dis-

tribution of expenses, while varying from month to month, is much more

uniform than income distribution (Figure 4). The highest point for

expenses is May, when 14 percent of the year's total is expended.

April and November follow with about 10.5 percent of the total. A low

of 4.5 percent of the season's total is reached in September.

The monthly value of oranges as received at concentrating

plants based on priced fruit is used here as the best available indi-

cation of monthly income distribution to growers. Delayed payments

from cooperatives and participation plans change the distribution

shown in the graph. During the first few months of the new crop, some

income is received from the immediately previous season's production.

About 19 percent of the year's total income is received in May. This

drops to an average of 8 percent in June. This is followed by about

five months when no income is received. Returns from early oranges

begin in volume in December and increase sharply in January to 22 per-

cent of the year's total.








Percent of
Total Previous
O Expenses SSeason's
Exn Receipts

30





H
c 20

*.I
":-'



10 ... .:.






0 1 ...- I ..
Mar. Apr. May June July Aug. Sept. Oct.


Figure 4.--Monthly Expenses in the Production of Oran es and
Used in Frozen Orange Concentrate, Florida-


Total Farm Dollar Receipts from Oranges


Expenses from Zach Savage, Estimating the Value of Citrus as It Develops, Agr. Ext. Ser. Econ. Series
64-6, Agr. Ext. Ser., Gainesville, Florida, p. 8, which is the average for 1956-57 through 1962-63.
Receipts are the 1960-61 through 1963-64 average from Florida Canners Association, Statistical Summary,
Season of 1963-1964.











So, in a given season beginning in March, a grower must use

the previous season's receipts or some other source of money to

finance the new crop until the following December. A grower special-

izing in early, mid-season, or late oranges would have an even greater

disparity in income distribution by months during the year.


Organization for marketing

In considering how orange growers are organized to market

their crops, only the processing sector and, when possible, only the

frozen concentrate part will be analyzed. Published information is

not available showing detailed present or recent organization of the

industry.

In 1958-59, 38 percent of the citrus produced in Florida for

processing was sold through cooperatives.24 A more recent study in-

cluded cooperatives that handled 22.7 million boxes during the 1962-63

season. This represented.36 percent of the oranges processed in the

state that season. Thirteen percent was handled by cooperative pro-

cessing plants, and 23 percent was handled by what the author termed

"bargaining associations." These firms contracted with a processing

organization for the processing of their members' fruit and are be-

lieved to be essentially cooperative participation plans.25

Pricing arrangements for oranges used for frozen concentrate

are reported annually by the Florida Canners Association. According



24
24H. G. Hamilton, Maxey Love and A. H. Spurlock, Florida
Cooperatives, University of Florida Agricultural Experiment Stations
Bulletin 672, May 1964, p. 7.


25Julian Ralph Meitin, Pooling Arrangements for Citrus Coop-
eratives Under Distressed Conditions, unpublished Master of Science
thesis, University of Florida, April 1965, p. 75.










to these reports, between 65 and 75 percent of the annual volume of

oranges processed move to processors without a definite agreed-upon

price (Table 5). This includes cooperatives, grower participation

plans, and other arrangements, such as volume coming from processor

owned or leased groves. The remainder of the crop goes to concentrate

processors at a price determined by spot market, contract, or bulk

sales. The share of the fruit which is priced when the processor

receives it, has declined over time.


Table 5.-- Pricing Arrangements for Florida Oranges Used for Frozen
Concentrate, 1960-61 through 1964-65 Seasons



Type of Pricing Season
Arrangement 1960-61 1961-62 1962-63 1963-64 1964-65
- - Million Boxes - -

Non-Priced
Participation 6.7a 14.0a 11.8a 7.3 11.1
Cooperative & other 26.3 31.2 22.2 15.5 27.6
Total 33.0 45.2 34.0 22.8 38.7
Priced
Spot 5.3 9.5 6.7 3.7 4.8
Contract 14.3 16.2 5.9 6.6 9.4
Bulk 2.5 2.9 0.5 1.0 1.6
Other 0.7 0 0 0 0
Total 22.8 28.5 13.1 11.3 15.8

Total Priced and
Non-Priced 55.8 73.7 47.1 34.1 54.5
Percent Non-Priced 59 61 72 67 71


aDesignated as "season variety average price modified by some
formula."

Source: Florida Canners Association, Orange--Utilization,
Prices and Yields (weekly reports), Winter Haven,
Florida, 1960-61 through 1964-65 seasons.
















Processor Level

Procurement and distribution pattern

December of each year starts the beginning of a new process-

ing season for frozen orange concentrate. During the last few years,

an average of 13 percent of processors' receipts of raw oranges was

supplied during this month (Figure 5). A high of 22 percent was

reached in January. Between 9 and 16 percent of the season's volume

is processed monthly from February through June. While the season's

volume is received and processed in seven or eight months, sales are

fairly uniform over the entire year. This requires that the product

be stored and has important implications to possible futures trading.

This type of distribution is similar to the relationship between

receipts and expenditures in the production of the orange crop by

growers. January typically is the month of greatest shipment of

finished product with 11 percent of the total. During the 1960-61

through 1963-64 seasons, processor shipments of frozen orange concen-

trate for other months during the year averaged 7 to 9 percent of the

season's total.


Price variability of frozen orange concentrate

/Wholesale price quotations for frozen concentrated orange

juice change much less often than prices paid to growers for the raw

fruit. Table 6 shows monthly average prices computed from F.O.B.

wholesale price quotations for the average of unadvertised brands.
















Processor Level

Procurement and distribution pattern

December of each year starts the beginning of a new process-

ing season for frozen orange concentrate. During the last few years,

an average of 13 percent of processors' receipts of raw oranges was

supplied during this month (Figure 5). A high of 22 percent was

reached in January. Between 9 and 16 percent of the season's volume

is processed monthly from February through June. While the season's

volume is received and processed in seven or eight months, sales are

fairly uniform over the entire year. This requires that the product

be stored and has important implications to possible futures trading.

This type of distribution is similar to the relationship between

receipts and expenditures in the production of the orange crop by

growers. January typically is the month of greatest shipment of

finished product with 11 percent of the total. During the 1960-61

through 1963-64 seasons, processor shipments of frozen orange concen-

trate for other months during the year averaged 7 to 9 percent of the

season's total.


Price variability of frozen orange concentrate

/Wholesale price quotations for frozen concentrated orange

juice change much less often than prices paid to growers for the raw

fruit. Table 6 shows monthly average prices computed from F.O.B.

wholesale price quotations for the average of unadvertised brands.
















Processor Level

Procurement and distribution pattern

December of each year starts the beginning of a new process-

ing season for frozen orange concentrate. During the last few years,

an average of 13 percent of processors' receipts of raw oranges was

supplied during this month (Figure 5). A high of 22 percent was

reached in January. Between 9 and 16 percent of the season's volume

is processed monthly from February through June. While the season's

volume is received and processed in seven or eight months, sales are

fairly uniform over the entire year. This requires that the product

be stored and has important implications to possible futures trading.

This type of distribution is similar to the relationship between

receipts and expenditures in the production of the orange crop by

growers. January typically is the month of greatest shipment of

finished product with 11 percent of the total. During the 1960-61

through 1963-64 seasons, processor shipments of frozen orange concen-

trate for other months during the year averaged 7 to 9 percent of the

season's total.


Price variability of frozen orange concentrate

/Wholesale price quotations for frozen concentrated orange

juice change much less often than prices paid to growers for the raw

fruit. Table 6 shows monthly average prices computed from F.O.B.

wholesale price quotations for the average of unadvertised brands.





Percent of
Total
O Receipts
30


E Shipments


- V &L L I. In_ __- YL.__-W f^


7Luril


1 1


Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct.
Figure 5.--Monthly Receipts of Oranges at Concentrating Plants and Monthly Processor Shipments
of Frozen Orange Concentrate, Floridal
Average of 1960-61 through 1963-64 seasons.
Source: Florida Canners Association, Statistical Summary, Season of 1963-1964 and Season of 1964-1965.


101


4Z









Table 6.--Average Monthly Wholesale Prices of Frozen Concentrated Orange Juice, Florida, 1954-55 through
1964-65 Seasons


Month Season
Season
Seao Average
Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.
----------------------------------Dollars per dozen 6-ounce cans----------------------------------

1954-55 1.00 1.00 1.02 1.16 1.25 1.25 1.26 1.35 1.35 1.35 1.35 1.35 1.20

1955-56 1.35 1.35 1.35 1.35 1.35 1.35 1.39 1.45 1.45 1.45 1.35 1.35 1.37

1956-57 1.25 1.25 1.25 1.25 1.06 1.00 1.00 1.04 1.18 1.25 1.25 1.25 1.16

1957-58 1.25 1.59 1.80 2.00 2.00 2.00 2.15 2.25 2.25 2.25 2.25 2.25 1.96

1958-59 1.81 1.75 1.75 1.75 1.75 1.79 2.00 2.00 2.00 2.00 2.00 1.51 1.83

1959-60 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.59 1.65 1.65 1.53

1960-61 1.65 1.75 2.00 1.89 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.77

1961-62 1.62 1.50 1.38 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.30 1.38

1962-63 1.49 2.19 2.30 2.30 2.38 2.55 2.55 2.55 2.55 2.55 2.55 2.55 2.30

1963-64 2.55 2.55 2.55 2.46 2.44 2.30 2.30 2.30 2.30 2.30 2.30 2.30 2.39

1964-65 2.13 1.85 1.85 1.70 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.64


Source: Computed from average F.O


.B. quotations of unadvertised brands of Florida orange concentrate as


reported by Florida Citrus Mutual. Since tradition in the industry allows buyers protection when
prices are changed, price decreases were backdated 4 weeks and increases were delayed 3 weeks.
Prices were weighted by weekly shipments of finished product by processors.









These are not specific prices actually received by concentrators, but

it is believed that actual prices would not be greatly different from

those shown in the table, if they were available.

For the eleven seasons shown in the table, prices during the

latter part of the season were definitely higher during four seasons.

They were definitely lower during three seasons, two of which were the

last two seasons, 1963-64 and 1964-65.

Average retail prices of frozen concentrated orange juice are

published by the Florida Citrus Commission. From these prices, the

simple average monthly prices per dozen 6-ounce cans were computed

(Table 7). Retail prices follow wholesale prices quite closely.

The relationship between quoted wholesale prices and average

retail prices by seasons is shown in Table 8. The annual average

difference between the two series ranged from $0.65 to $0.79, with

the larger difference occurring in 1958-59 and 1963-64, seasons

following those during which freezes occurred. During 6 of the 11

seasons, the difference ranged between $0.65 and $0.69 per dozen.

The average wholesale-retail margin ranged from 24 to 36 percent

annually.










Table 7.--Average Monthly Retail Prices of Florida Frozen Concentrated Orange Juice, United States, 1954-55
through 1964-65 Seasons


Month Season
Season
Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Average
-------------------------------------Dollars per dozen 6-ounce cans--------------------------------

1954-55 1.90 1.81 1.68 1.78 1.82 1.83 1.84 1.90 1.96 1.98 1.99 2.00 1.87

1955-56 2.00 1.99 2.01 2.01 1.97 1.98 2.00 2.04 2.08 2.07 2.04 2.01 2.02

1956-57 1.99 1.96 1.95 1.91 1.90 1.77 1.60 1.63 1.73 1.78 1.82 1.85 1.82

1957-58 1.91 2.27 2.44 2.53 2.66 2.71 2.87 2.90 2.97 2.97 2.97 3.00 2.68

1958-59 3.06 2.73 2.46 2.42 2.43 2.46 2.56 2.64 2.67 2.66 2.67 2.66 2.62

1959-60 2.32 2.19 2.20 2.17 2.14 2.16 2.15 2.16 2.17 2.20 2.25 2.30 2.20

1960-61 2.33 2.44 2.60 2.65 2.59 2.46 2.46 2.42 2.41 2.41 2.38 2.42 2.46

1961-62 2.39 2.29 2.15 2.06 1.96 1.96 1.96 1.97 1.96 1.92 1.91 1.91 2.04

1962-63 1.95 2.55 2.72 2.79 3.05 3.30 3.34 3.38 3.39 3.34 3.33 3.29 3.04

1963-64 3.34 3.30 3.29 3.29 3.28 3.09 3.08 3.09 3.08 3.05 3.02 3.03 3.16

1964-65 2.98 2.80 2.56 2.54 2.46 2.19 2.16 2.15 2.13 2.09 2.08 2.08 2.35


Source: Computed from weekly average figures
Economic Research Department, Concen
Purchases.


based on cents per 6-ounce can.


Florida Citrus


Commission,


treated, Chilled and Canned Citrus Juices, National Consumer









Table 8.-- Average Annual Retail Prices, Wholesale Price Quotations,
and Wholesale-Retail Margins of Frozen Concentrated Orange
Juice, 1954-55 through 1963-64 Seasons


Season


Wholesale
Price Wholesale -
Quotation Difference
- dollars per dozen - -

1.20 .67

1.37 .65

1.16 .66

1.96 .72

1.83 .79

1.53 .67

1.77 .69

1.38 .66

2.30 .74

2.39 .77

1.64 .71


Retail
Pricea


1.87

2.02

1.82

2.68

2.62

2.20

2.46

2.04

3.04

3.16

2.35


a From Table 7.

b
From Table 6.


CMargin was calculated by dividing the difference by the retail
price. Transportation charges must be added to the wholesale prices to
make them comparable with retail prices.


Changes in type of pack

Until the 1953-54 season the proportion of the frozen orange

concentrate pack put up in bulk form, mostly 50 or 55 gallon drums,

amounted to from 5 to 15 percent of the total. The big increase in

the proportion of bulk packed came after the end of the 1956-57 season.


Retail
Marginc
percent

36

32

36

27

31

30

28

32

24

24

30


1954-55

1955-56

1956-57

1957-58

1958-59

1959-60

1960-61

1961-62

1962-63

1963-64

1964-65


I











Since 1960-61, between 40 and 60 percent of the frozen concentrate

pack has been put up in bulk form (Table 9).

Most of the bulk pack is reprocessed into retail and institu-

tional size containers of frozen concentrate. The remainder of the

bulk moves as bulk and is utilized in different ways. From 5 to 6

million gallons of bulk concentrate are used by the chilled juice

industry. In recent years, between 3 and 4 million gallons have been

used as a beverage base and in diluted drinks. The export market has

taken up to a high of 1.7 million gallons, while the usage of 1 to 2

million gallons annually has not been identified in published reports.

With a relatively high proportion of the total frozen concen-

trate being packed in bulk form, (mostly 50 or 55 gallon drums) it

would appear that multiples of this unit would make a likely trading

unit for frozen orange concentrate. However, while the amount avail-

able for sale in bulk form as bulk juice has increased in recent years,

it still represents only 15 to 18 percent of the total frozen orange

concentrate moved during the season.











Table 9.--Total Pack and Movement of Frozen Orange Concentrate and Amount
Packed and Moved as Bulk and Reprocessed into Frozen Concentrate,
Florida, 1952-53 through 1964-65


Movement

Season Pack Bulk
Percent Total As Reprocessed
Total Bulk Bulk Bulk into Frozen Total
Concentrate

million gallons percent ---------million gallonsa--------

1952-53 46.6 6.5 14 50.5

1953-54 65.6 11.1 17 53.7

1954-55 65.5 10.9 17 72.2

1955-56 69.6 13.6 20 66.5

1956-57 72.5 16.1 22 73.7

1957-58 56.8 22.0 39 61.6

1958-59 80.0 21.0 26 70.1 7.5 10.4 17.9

1959-60 78.0 22.2 28 84.9 8.3 16.1 24.4

1960-61 84.4 25.9 31 80.4 8.2 16.4 24.6

1961-62 115.9 48.1 42 95.7 14.0 19.9 33.9

1962-63 51.6 30.5 59 70.0 12.9 29.5 42.4

1963-64 53.7 24.7 46 61.4 9.6 20.6 30.2

1964-65 88.9 43.4 49 77.9b 13.7b 25.7b 39.lb


a42 Brix

bThrough November 27, 1965

Source: Florida Canners Association, Statistical Summary,
Season of 1963-64, and Frozen Concentrated Orange
Juice--Carryover, Pack and Movement of Goods on
Hand (weekly report), Winter Haven, Florida.















POSSIBLE UNITS OF TRADING IN FLORIDA FRESH ORANGES AND/OR CONCENTRATE


Commodities are bought and sold in futures markets by contracts.

These contracts are standardized for a particular exchange. The details

of these contracts include the quantity of the commodity represented by

the contract. This amount is generally referred to as the "unit of

trading" or "contract unit." Considerable time and effort have been

given to determining a possible unit of trading in frozen concentrated

orange juice. It has been suggested that the unit for trading be 15,000

pounds of orange solids at 580 Brix with allowable variations in the

quantity of the delivery not to exceed 3 percent. At 580 Brix the

recommended contract would be 2,433 gallons, or 44.2 drums, each with a

capacity of 55 gallons.26

Another possible contract would be fresh oranges on the tree.

Oranges for use in the production of frozen concentrate are normally

sold by the grower in this manner. Because Valencia oranges remain on

the tree longer and can be picked over a longer period of time than

other varieties, it appears that this variety offers more potential for

contract development than others. A trading unit which would closely

parallel the trading unit discussed for concentrate would be 2,500

boxes, weighing 90 pounds each, based on the average solids content of



2At this degree Brix, there are 6.1654 pounds of solids per
gallon of frozen concentrate. Net weight per gallon is 10.63 pounds.








27
fresh oranges used for frozen concentrate.27 A trading unit of one-

half of this amount, or 1,250 boxes, of Valencia oranges on the tree

might be considered. In the case of frozen orange concentrate a "job

lot" could be 5,000 pounds of orange solids, but decisions as to

whether or not to have these trading units should be reserved for the

trade. "Job lots" are less than full contracts and are used in futures

trading with some commodities. It should be pointed out, however, that

they are traded separately from full contracts and an equivalent volume

of them can offset a full contract only under very special circumstances.

There are a number of other contract details which must be

determined by the trade. These include such items as delivery months,

delivery points, maximum price fluctuations, price quotations, deliv-

erable grades of the product, and margin requirements.




























27
The ten-season (1954-55 through 1963-64) average yield in
pounds solids per box was 5.99607 as reported by the Florida Canners
Association.















DEVELOPMENT OF INTEREST IN FUTURES TRADING IN THE ORANGE INDUSTRY


Interest in futures trading in Florida citrus and/or citrus

products goes back to the late 1940's, when this marketing technique

was proposed for industry discussion. In the early 1950's, a panel

discussion on the subject was held at the Citrus Institute at Camp

McQuarrie, Florida. In 1954, Mr. G. G. Ware, a banker and member of

the Citrus Committee of the Florida Bankers Association, presented a

paper on citrus futures trading. Since this paper is often referred

to when the subject of futures trading in citrus is discussed, the

major points should be presented and discussed.

Mr. Ware indicated:

Florida's premier [sic] citrus crop representing
30 percent of the world's production and near to 70
percent of the United States' production, has, for
decades past, been bedeviled by extreme price gyrations.
All its life it has lived on a feast or famine basis. .
It is because of this continued wide price swinging
characteristic of our citrus crop the most important
agricultural crop in Florida's economy that we, as
representatives of the Florida Bankers Association, pre-
sume to bring you suggestions. The bankers' primary
interest is in the grower, and for a number of very valid
reasons; there are more of them they are the fountain-
head of the industry and when the grower is not pros-
perous, the entire economy of the State is impaired.28

Mr. Ware quoted from a statement he had received from a major

United States Bank:

.effectively describing the purposes and functions
of hedging contracts:


28
2Statement presented by Mr. G. G. Ware before a joint
meeting of the several citrus interests of Florida at Lakeland,
Florida, May 14, 1954, pp. 1 and 2.










"The production of many commodities is distinctly
seasonal; whereas utilization is more or less steady
the year round. The system of trading in futures
contracts was devised to bring stability to prices by
eliminating or minimizing the wide swings occasioned
by seasonal fluctuations in supply and demand."
That quotation very effectively suggests a pres-
cription for our ailing and wide price swinging citrus
industry.29

He further stated:

A "futures" market for Florida citrus concentrate
and single-strength juice, after it has been in opera-
tion for a few months, would clearly reflect what
everybody in the world interested in Florida citrus
and its competition would think about Florida citrus
values, on a day to day, hour to hour, minute to minute
basis. After that event, our market should become more
stabilized, and its swings, heretofore traveling in an
extremely wide orbit, should be of a more gentle variety
and should travel in a narrower orbit nearer to the top
than the bottom of the old wide orbit.30

Mr. Ware stated further:

S. A "futures" market will permit a higher price to
the grower, a lower cost to the consumer and a more
certain profit to the handler.

He concluded with a statement and recommendation by the Citrus

Committee of the Florida Bankers Association, and authorized for pre-

sentation by the Executive Committee of that Association:

We believe the more than 100 years of successful
operation of commodity exchanges -- plus the "testi-
mony" we are privileged to submit from a number of the
largest banks in the nation saying they approve of
"hedging" and that they require it in connection with
commodity loans, in most cases, when it is available,
justify our recommendation that the establishment of
a trading post for Florida processed citrus on a com-
modity exchange be investigated by the Florida citrus
industry.


29
29Ibid., p. 2.


30Ibid., p. 4.


31bid., p. 7.
Ibid., p. 7.









We believe in the "futures' system and that it has
possibilities for material advantage to our citrus
industry.32

The relationship of futures trading and price stability has

been discussed earlier in this report. The system of trading in

futures contracts was not devised primarily to bring stability to

prices by eliminating or minimizing the wide swings occasioned by

seasonal fluctuations in supply and demand. The futures market

certainly cannot eliminate these wide swings nor increase the level

of prices. It may, however, minimize these swings but they still

may be very wide. The industry should give serious thought to the

proposition advanced that futures trading will permit a higher price

to the grower, a lower cost to the consumer, and more certain profit

to the handler. This is a large order and futures trading is not

likely to bring about such circumstances.


Previous Research

The first organized research project on futures trading in

citrus in recent times was reported in February 1957. Mr. William

T. Wesson,of the U. S. Department of Agriculture, stated:

Futures trading is not an independent activity,
but is interrelated with the whole marketing system.
Whether or not organized futures would be useful or
even feasible for a specific commodity depends largely
upon the characteristics of the commodity and the
structure of the market. .
Such an examination of the marketing system for
frozen orange concentrate and oranges indicates that
possibilities of futures trading in these commodities
are unfavorable at present. This conclusion is based
on the following characteristics of the markets for
these products:


32bid., p. 8.
Ibid., p. 8.









1. To a substantial degree, the various phases
of production and marketing of frozen orange
concentrate and oranges are vertically inte-
grated; that is, two or more phases of pro-
duction or marketing are controlled by the
same firm. Consequently, the numbers of buyers
and sellers tend to be low, and the volume of
trading in these commodities that takes place
under open or free market conditions is rela-
tively small.

2. Orange concentrate is, for the most part, pro-
duced and marketed under brand names and con-
siderable significance is assigned the brand
name in the buying and selling of the product
at all levels of trade. Because of the im-
portance of brands in this respect, it appears
impossible, under present conditions, to estab-
lish a futures contract that is in line with
trade interests.

3. Market information on orange concentrate and
oranges is not very widely distributed. The
limited distribution reflects the absence of
a demand for such information by individuals
outside the citrus industry who might be inter-
ested in futures trading. This is a condition
that is to be expected, since it is difficult
for these individuals to make use of such in-
formation in an integrated industry.

4. There is a high degree of concentration of
control in the citrus market.

5. The nature of futures trading is such that its
use as an aid to financing would necessitate a
greater division and redistribution of the own-
ership responsibility in the manufacturing and
marketing of orange concentrate and oranges.
The development of the citrus market has been
in the direction of increased concentration of
ownership at the manufacturing, storage, and
distribution levels, including retailing in a
few instances. Among other effects, this con-
solidation of ownership enables price risks to
be spread over a large number of items, none of
which may follow the same price pattern. This
development has increased capital requirements
of the firms operating in this industry. In
the case of financing through futures trading,
part of the gains or losses that otherwise
would be received by the integrated firm go to
participants in the futures market. Thus, the








advantages expected from integration of succes-
sive phases of the production and marketing
process are best achieved through financing by
some other means, such as the sale of securities.
Futures trading moderates the effect of integra-
tion, since participants in the futures markets
become claimants to the yield realized from cer-
tain phases of the process.

Finally, it should be kept in mind that these con-
clusions are based upon characteristics of the citrus
market as of 1954-55. The findings do not, therefore,
rule out the possibility that the Florida citrus market
may later be more favorable to the development of futures
trading.33

The purpose of this study and the conclusions appear to be

logical in view of the conditions existing in the industry at that

time.

Another publication on this subject was issued in October

1962.34 In June of that year, faculty members at the Harvard Graduate

School of Business Administration were asked by Florida Citrus Mutual

to study the question, Will'A Concentrate Futures Market Benefit the

Florida Citrus Industry? Their findings and recommendations to the

Florida citrus industry were contained in a report by the same title.35

The conclusions and recommendations were as follows:

1. This report recommends the utilization of a
frozen orange concentrate futures market.


33
3William T. Wesson, Possibilities for Futures Trading in
Florida Citrus Fruit and Products, U. S. Department of Agriculture,
Agricultural Marketing Service, Marketing Research Division, in
cooperation with Florida Agricultural Experiment Stations, Marketing
Research Report No. 156, Washington, D. C., February 1957, pp. iii-iv.

34Florida Citrus Mutual Triangle, Vol. 12, No. 14, Lakeland,
Florida, October 26, 1962.

35
3Anonymous, Will A Concentrate Futures Market Benefit the
Florida Citrus Industry? A Study by faculty members of the Harvard
Graduate School of Business Administration for Florida Citrus Mutual,
undated, p. 13-14.










a. It should prove to be beneficial to the
growers as an additional hedging device
to be utilized separately or as a price
formula in contract supply arrangements.

b. The futures market should prove valuable
as a hedging device for proposed (coop-
erative) buffer-stock inventory pool
program.

c. It may prove beneficial in providing an
additional method of procurement hedging
by the processors.

d. It also should allow banks to loan funds
to the industry for inventory purposes in
large amounts and/or at reduced rates.

e. It may prove to be beneficial to all seg-
ments of the industry if price fluctuations
are reduced enough to permit better utili-
zation of promotional and merchandising
activities, especially at the consumer
level.

f. It should provide a healthier climate for
those entrepreneurs who might prefer to
"outguess the market" in public rather than
in private.

g. The futures market should also help to
raise the quality and standards of the
products of the frozen orange concentrate
industry and thereby enlarge the total
market for these products.36

The writers went into some detail on several problems that

were raised by members of the citrus industry, such as:

1. Market Manipulation The most feared problem
is that attempts by speculators within and
outside of the industry may increase rather
than decrease the seasonal and between-crop
price movements of frozen orange concentrate.


2. A Thin Market Perhaps the greatest practi-
cal problem is the amount of trading that will
take place in such a market during the initial
period. A great deal of education as to the


3Ibid., pp. 13-14.









uses of such a market by all segments of the
industry will be necessary in order to encourage
enough participation so that buying and selling
at minimum fluctuations of price will take place.


3. Provisions of the Contract May Prove Unsuitable -
Although several processors believe that some
frozen concentrate would prove unacceptable for
delivery purposes for their own particular firm's
use, all agreed that there is enough high quality
frozen concentrate produced and inventoried that
would prove to be adequate enough to provide ac-
ceptable deliverable quality for a workable futures
market. In addition, the cost of 2 to 3C a gallon
in utilizing 50 to 55 gallon drums in a continuous
6 oz. can operation, is not prohibitive. Current
processing operations have permitted such utiliza-
tion by most of the industry. 37

This report was released just a few months before the December

1962 freeze. Other problems facing the industry have overshadowed

discussions on the subject of futures until recently.


Changes in the Industry

Mr. Hamilton Hunt, Senior Vice President of the Exchange

National Bank of Tampa, discussed the topic "What A Citrus Futures

Market Might Mean to Citrus Growers" at the 32nd Annual Citrus

Growers Institute, Camp McQuarrie, Florida, on August 18, 1965.

He is a member of the Florida Bankers Citrus Committee and served on

the Committee with Mr. G. G. Ware a number of years ago. He dis-

cussed the five concluding points of Wesson's research (see pages

54-56) in light of the changes which have taken place in the

industry since his report was published.


3Ibid., pp. 10-12.









Mr. Hunt had asked a friend, whom he considered to be one of

the most knowledgeable individuals in the citrus industry, to comment

on Wesson's report. He stated:

The point on vertical integration is still valid.
However, if the industry continues to produce the
very substantial quantities of bulk which they have
the past year, it is not as important as it would
be otherwise. However, it bears importantly on the
question of whether the industry would use the futures
market. My own feeling is the industry just does not
understand a futures market and activity would depend
on an educational program.38

He stated that the point of concentrate being primarily

produced under brand names is no longer valid. The questions of brands

has been minimized, since many processors pack retail quality products

directly from bulk (Point 2). Point 3 on market information is no

longer valid, since information is widely distributed and is fairly
39
accurate. He stated further:

Point 4, the high degree of concentration of control
is still valid. Again, this is related to the question
of whether there would be outside speculators and their
amount of activity in relation to activity of the
industry. .

Point 5. The reason there has been concentration of
control is to some extent a defense measure and if
there were available financing the concentration
might not be quite so high. This gentleman says
"I believe a futures market, if it were understood and
operated properly could be beneficial to the citrus
industry. The only disadvantages I see are those
related to improper operation."40

The changes in the industry discussed here seem to be the most

important ones, since the first research report on futures trading in

the orange industry was released in 1957. There have been no recent


38
3Hamilton Hunt, "What A Citrus Futures Market Might Mean to
Citrus Growers," The Citrus Industry, Vol. 46, No. 10, October 1965,
p. 20.
39Ibid., p. 20.

40Ibid., p. 20.
Ibid., p. 20.











studies of the structure of the orange industry, either in the

producing or processing sectors. Therefore, the degree of

concentration of control within the industry has not been defined

precisely, but industry leaders are generally familiar with the

extent of concentration. The change in degree of vertical

integration has been covered in an earlier section of this report.

The change in proportion of the crop processed and moved as bulk

concentrate has also been mentioned.

Prices for frozen orange concentrate, reported earlier,

referred to retail units. There are no published prices on bulk

concentrate, but they probably are closely related to F.O.B. and

retail unit prices. If futures trading were initiated on bulk

concentrate or fresh fruit, complete price information would be

required for trading.















HOW FUTURES TRADING MIGHT OPERATE IN THE ORANGE INDUSTRY


It was pointed out that a successful futures market must

serve a felt need. The need for a futures market must be realized

not only by the Florida orange industry as a whole, but also by

individual industry members and firms. Otherwise, motivation for

trading will not exist.

The characteristics of the orange industry have been examined

in terms of price variability, distribution of production expenses and

receipts, utilization of the crop, marketing organization, and con-

centration of processing interests. All of these factors have a

bearing on the need of individuals in the industry to hedge their

operations, and hedging is basic to the success of a futures market.

Hedging in a citrus futures market against price changes is

possible only for those individuals or firms engaged in producing,

handling or processing oranges. This includes marketing firms as

well as members of the Florida citrus industry. The reasons for

hedging might, however, be quite different among the participants in

futures hedging. Some may hedge purely as protection against price

changes; others may hedge to facilitate credit arrangements or to

provide more desirable income distribution during the year. The

reason for hedging is much less important to the success of a futures

market than is the realization that such trading holds potential

financial benefits for the trader.












The Citrus Grower


The producer of oranges has several alternative ways of

marketing his fruit. He may at any time during the production period

sell his oranges for cash on the open or "spot" market. Such a sale

is terminal and he bears the entire risk for the decision to sell at

a-stated price. Rather than bear the entire risk of selling his fruit

on the open market, he may select other marketing alternatives. He

may join a cooperative through which his crop is sold fresh or

processed and his returns are based on the returns received by the

cooperative from the sale of all its members' fruit. A third choice

involves his entry into a participation plan. This choice assures

the grower that his returns will be associated with the profits received

from the sale of the finished product and that his price per box will be

equal to that of other participants in the plan, other things being

equal. Both cooperative marketing and participation plans assure the

grower that his returns will reflect changes in the over-all level of

fruit prices. He, therefore, avoids the risk inherent in selling his

fruit on a given day at a stated price.

To the extent that growers engage in forward selling and are

satisfied with current arrangements for doing so, the need for hedging

is reduced. Growers who prefer to assume the risks of selling fruit

on the cash market may realize a greater need for hedging. It is

estimated that about 70 percent of the Florida orange crop used for

frozen concentrate is marketed through cooperatives or participation

plans, or comes from processor owned or rented groves. Therefore, a

greater need for hedging will apparently exist for growers of the

remaining 30 percent of the orange crop.











Growers of Florida citrus must recognize that a futures market

does not "make" prices, but merely reflects prices as established by

existing supplies and the demand for fruit. The futures market will

provide growers another alternative marketing tool which would take its

place along with existing arrangements for marketing. The extent to

which existing forward selling plans would be replaced or altered as a

result of adding a futures market cannot be determined at this time.

Whether a futures contract is established for fresh oranges

and/or concentrate, will determine the nature of grower participation

in futures trading. The hedging objectives and trading principles

would be the same for either contract. Price variability is much greater

in the fresh fruit market, and a fresh fruit contract would provide

growers a more direct hedge against changes in the value of their fruit.

A grower could, however, trade in concentrate contracts as a hedge

against price changes for.fresh fruit sold to processors. The hedge

would be more indirect since concentrate price changes are smaller and

less frequent than changes in fresh fruit prices. The effectiveness of

hedging in concentrate would depend on the relationship between prices

for fresh fruit used in the manufacture of concentrate and wholesale

prices for the finished product.


The Speculative Citrus Trader

The speculative buyer and seller of citrus fruit, commonly

called the "bird dog," is an important factor in marketing Florida

citrus. Questions have arisen concerning the effect of a futures

market on such operations.











Profit from these operations depends, as in any speculative

deal, on buying fruit for as low a price as possible with the

expectation of selling it at a higher price. Futures trading simply

adds another device for use in speculation or hedging. There is no

apparent reason why speculators would not choose to hedge their

purchases of fresh fruit with futures contracts. Assuming a positive

relationship between fresh fruit and futures prices, the speculator

could hedge against price changes just as well as could growers. He

might further choose to speculate in futures in addition to or instead

of fresh fruit. The speculative principle would be no different. The

basis for operations in futures would be a nationally publicized price

established collectively by all traders in futures contracts. This

contrasts to the individual price bargaining which characterizes

current speculative practices.


The Citrus Processor

The orange processor, being in the unique position of a fresh

fruit buyer and a seller of storeable processed products, appears to be

in an advantageous position for futures trading. Trading in concentrate

contracts would make it possible for processors to hedge against changes

in prices of their finished product and protect their processing margins.

Fresh fruit contracts could provide hedging against price changes in

fruit bought for processing.

By selling contracts for concentrate they could help insure

against price declines on the finished product pack. The hedge could

be completed by delivering concentrate against the contracts or by

buying the same number of contracts previously sold, whichever was to

their advantage.











If fresh fruit contracts are traded, processors could buy

contracts for fruit to be delivered during the processing season

and hedge against a price increase. These contracts could be

completed by accepting delivery of fruit or by selling the same

number of contracts previously bought and buying fruit on the cash

market, whichever was to their advantage. Assuming that the futures

price and cash price moved together, a loss or gain on the sale of

contracts could be partially or wholly offset by changes in cash

fruit prices.


















CONCLUSIONS


As with most things, nothing is completely good or bad. It

appears that this is clearly true of futures trading in Florida

oranges and/or frozen concentrate. The issue will likely remain

controversial whether or not a futures market is established.

The most logical approach to a decision on whether or not a futures

market is needed is a careful weighing of the favorable and unfavor-

able factors involved. The industry itself must decide which group

of factors weigh the heavier in view of industry alternatives and

the costs of making a wrong decision. The costs will necessarily

be subject to some conjecture before and after a decision is reached.

The following are factors which seem to be the most important

in making a decision on futures trading in fresh oranges and/or frozen

orange concentrate. No attempt was made to rank them in order of

importance. These factors will not remain static over time. Many of

them are as dynamic as the industry itself. They will change as the

industry changes in (1) knowledge, (2) structure, and (3) available

alternatives.


Fresh Valencia Oranges

Factors conducive to the development of futures trading

1. Uncertainty of supply from season to season.

2. Fluctuating on-tree prices.


















CONCLUSIONS


As with most things, nothing is completely good or bad. It

appears that this is clearly true of futures trading in Florida

oranges and/or frozen concentrate. The issue will likely remain

controversial whether or not a futures market is established.

The most logical approach to a decision on whether or not a futures

market is needed is a careful weighing of the favorable and unfavor-

able factors involved. The industry itself must decide which group

of factors weigh the heavier in view of industry alternatives and

the costs of making a wrong decision. The costs will necessarily

be subject to some conjecture before and after a decision is reached.

The following are factors which seem to be the most important

in making a decision on futures trading in fresh oranges and/or frozen

orange concentrate. No attempt was made to rank them in order of

importance. These factors will not remain static over time. Many of

them are as dynamic as the industry itself. They will change as the

industry changes in (1) knowledge, (2) structure, and (3) available

alternatives.


Fresh Valencia Oranges

Factors conducive to the development of futures trading

1. Uncertainty of supply from season to season.

2. Fluctuating on-tree prices.


















CONCLUSIONS


As with most things, nothing is completely good or bad. It

appears that this is clearly true of futures trading in Florida

oranges and/or frozen concentrate. The issue will likely remain

controversial whether or not a futures market is established.

The most logical approach to a decision on whether or not a futures

market is needed is a careful weighing of the favorable and unfavor-

able factors involved. The industry itself must decide which group

of factors weigh the heavier in view of industry alternatives and

the costs of making a wrong decision. The costs will necessarily

be subject to some conjecture before and after a decision is reached.

The following are factors which seem to be the most important

in making a decision on futures trading in fresh oranges and/or frozen

orange concentrate. No attempt was made to rank them in order of

importance. These factors will not remain static over time. Many of

them are as dynamic as the industry itself. They will change as the

industry changes in (1) knowledge, (2) structure, and (3) available

alternatives.


Fresh Valencia Oranges

Factors conducive to the development of futures trading

1. Uncertainty of supply from season to season.

2. Fluctuating on-tree prices.











3. Relatively constant expenses from month to month, while

income distribution is uneven requiring financing for

production expenses by growers.

4. Some forward selling at the present time, but some problems

with contract completion.

5. Lack of specific price information on forward sales.


Factors likely to impede the development of futures trading

1. Short harvest season and lack of storage other than on-tree.

2. Possible drastic changes in supply and quality because of

weather.

3. Difficult to apply to varieties other than Valencias.

4. Difficulty of establishing grade standards relative to the

finished product.

5. Present degree of vertical integration within the industry

and relatively small base from which to initiate trading.

6. Lack of general industry understanding of futures trading.


Frozen Orange Concentrate

Factors conducive to the development of futures trading

1. General lack of highly developed and widely disseminated

information on present and future prices.

2. Need of industry members for planning and adjusting to

changing price conditions.

3. Some forward selling at the present time.

4. Relatively stable shipments of concentrate from month to

month, while fluctuating inventory requires financing of

storage by processors.











3. Relatively constant expenses from month to month, while

income distribution is uneven requiring financing for

production expenses by growers.

4. Some forward selling at the present time, but some problems

with contract completion.

5. Lack of specific price information on forward sales.


Factors likely to impede the development of futures trading

1. Short harvest season and lack of storage other than on-tree.

2. Possible drastic changes in supply and quality because of

weather.

3. Difficult to apply to varieties other than Valencias.

4. Difficulty of establishing grade standards relative to the

finished product.

5. Present degree of vertical integration within the industry

and relatively small base from which to initiate trading.

6. Lack of general industry understanding of futures trading.


Frozen Orange Concentrate

Factors conducive to the development of futures trading

1. General lack of highly developed and widely disseminated

information on present and future prices.

2. Need of industry members for planning and adjusting to

changing price conditions.

3. Some forward selling at the present time.

4. Relatively stable shipments of concentrate from month to

month, while fluctuating inventory requires financing of

storage by processors.











3. Relatively constant expenses from month to month, while

income distribution is uneven requiring financing for

production expenses by growers.

4. Some forward selling at the present time, but some problems

with contract completion.

5. Lack of specific price information on forward sales.


Factors likely to impede the development of futures trading

1. Short harvest season and lack of storage other than on-tree.

2. Possible drastic changes in supply and quality because of

weather.

3. Difficult to apply to varieties other than Valencias.

4. Difficulty of establishing grade standards relative to the

finished product.

5. Present degree of vertical integration within the industry

and relatively small base from which to initiate trading.

6. Lack of general industry understanding of futures trading.


Frozen Orange Concentrate

Factors conducive to the development of futures trading

1. General lack of highly developed and widely disseminated

information on present and future prices.

2. Need of industry members for planning and adjusting to

changing price conditions.

3. Some forward selling at the present time.

4. Relatively stable shipments of concentrate from month to

month, while fluctuating inventory requires financing of

storage by processors.












5. Uncertainty of supply from season to season.


Factors likely to impede the development of futures trading

1. Possible lack of long hedgers.

2. Possible lack of speculative interest because of market

structure.

3. Lack of general industry understanding of futures trading.

4. Amount of product moved in bulk at the present time

compared with the total movement provides a relatively

small base from which to initiate futures trading.

5. Uncertainty of the effect of futures trading on retail

prices.
















SUMMARY


The subject of futures trading in oranges and/or frozen

orange concentrate has been studied and discussed by members of

the Florida orange industry since the early 1950's. Recently, it

has been indicated that more information is needed before a

decision is reached by industry members. This report provides

background material on which industry members can make a more

informed decision on the need for futures trading.

Time or forward contracts to buy or sell commodities in

this country were developed in response to specific marketing

needs. Two points are important in analyzing the history of

futures trading. They are the length of time required to develop

into organized trading and contract enforcement. For grain, butter

and eggs, and potatoes a period of 20 to 25 years was required

before organized trading began. Contract fulfillment under

forward trading was a crucial problem during periods when drastic

price changes occurred.

Contracts traded on the organized exchanges today are

commonly called futures contracts, or futures. Organized exchanges

perform many functions. Among the more important are believed to

be providing facilities for trading, transferring of legal titles

to contracts bought and sold, price discovery, and price publicity.

More recently, the thought has been advanced that futures markets











exist chiefly to facilitate the holding of contracts. By attracting

large volumes of risk capital hedging is made possible.

Two types of traders deal in futures contracts. Hedgers enter

the market in an effort to avoid losses resulting from price changes.

Speculators participate in the market to make money solely from price

changes. An effective, efficient market depends on the active partici-

pation of each type of trader.

There are several general characteristics a commodity should

have to be traded successfully in futures. In addition, market

conditions should be such that trading can be successful. This generally

involves freedom from market control which could materially affect price

just because of volume of trading.

The characteristics of Florida orange production having the most

bearing on futures trading relate to organization for marketing, supply,

supply utilization, prices received by growers, and monthly expense and

income distributions for the crop. Average prices received by growers

fluctuate from season to season and within a season. These changes are

very closely related to changes in supply and demand for oranges.

About two-thirds of the total orange crop, the most important citrus

fruit produced in the state, now goes for frozen concentrate. It is

logical, therefore, to think in terms of trading fresh oranges for use

in concentrate or trading in concentrate itself. Many Florida orange

growers are actively engaged in cooperatives which process and market

frozen orange concentrate or contract with processors for these services.

This, in addition to the volume of fruit coming from processor-owned or

leased groves, results in about 70 percent of the crop being sold without










a definitely agreed upon price. This proportion has increased in

recent years and reduces the raw product base on which futures

trading might initially take place.

Processors receive and process their supply of fresh oranges

in a period of seven or eight months, while their sales are quite

constant throughout the year. Wholesale price quotations for frozen

orange juice fluctuate from month to month and from season to season,

but move in much narrower ranges than prices for the raw product.

The proportion of the total frozen orange concentrate output

packed in the form of bulk juice has increased and now represents

about half the total pack. Most of this bulk juice is reprocessed

into frozen concentrate. A relatively small but increasing amount

moves as bulk juice. This trend is important, since this is the

product in which futures trading would most likely take place.

Previous research concerning futures trading in fresh oranges

and/or frozen orange concentrate was reviewed. The first report,

released in 1957, stated that an examination of the marketing system

for frozen orange concentrate and oranges indicated that the possi-

bilities of futures trading in these commodities were unfavorable as

of 1954-55. Another publication, released in 1962, recommended the

utilization of a frozen orange concentrate futures market, but the

authors examined in detail several problems raised by members of the

citrus industry. These were similar to the reservations spelled out

in the earlier publication.

In a paper delivered at the 32nd Annual Citrus Growers

Institute in August 1965, the research report reflecting 1954-55

conditions was reviewed in light of industry changes since that time.










The speaker indicated that several points raised in the earlier

report were essentially no longer valid. Two points, however, were

still of concern and related to the degree of vertical integration,

and the degree of concentration of control in the industry.

Most of the discussion of using futures trading by the Florida

orange industry has centered around two main areas. The first is

widely fluctuating prices for the raw product and, to a lesser extent,

wholesale prices received by processors for frozen orange concentrate.

The second is hedging against the effects of price changes. These are

two separate but related problems. Futures trading in oranges may

apply to the second area if industry participation and speculative

interest come from a broad base and future and cash prices maintain

a consistent relationship. While hedging against price changes is

considered to be one of the main functions of futures trading,

eliminating or reducing price variability is not. If hedging is widely

practiced, price fluctuations may well be minimized. This is a broad,

general statement, and prices could still change violently in response

to drastic production changes caused by weather or other factors.

Taken to the extreme, eliminating price fluctuations would completely

cancel the need for futures trading. As industry members study futures

trading, these factors must be considered. The real objective should

be to have prices result from this method of trading which accurately

reflect true supply and demand conditions.

Factors favorable and unfavorable to the development of futures

trading in oranges and/or orange concentrate are listed. Any decision

regarding the application of futures trading to the Florida orange

industry should be based on a careful evaluation of these factors.












































APPENDIX











SOME TRADING TERMS


Basic Grade



Basis


Broad Market


Broker


Commission


Commodity Trading
Account



Contract Market





Deliverable Grades





Delivery Month


Delivery Points


Futures Contract







Futures Market


grade deliverable on a futures contract at the
price stated in the contract. Also called the
"basis" grade.

difference between the cash (spot) price and the
price of a particular futures.

an active market including many trades. It is
one which can absorb increased volume of trading
without price being affected by volume of trading
alone.

one who executes a buy or sell order of a custo-
mer for a commission.

fee charged by brokers to buy and sell futures
contracts.


an account established by a person wishing to
trade in futures with a member of the various
commodity exchanges.

a futures market (commodity exchange) licensed by
the Secretary of Agriculture pursuant to the Com-
modity Exchange Act to conduct trading in one or
more commodities.

different grades which can be delivered against a
futures contract at premiums or discounts except
the basic contract grade is deliverable at the
contract price.

the month specified for product delivery on a
particular contract.

places where the commodity can be delivered should
the futures contract be fulfilled by delivery.

--or futures-- is one under which the seller
agrees to sell and the buyer agrees to purchase
given quantities of a commodity at a stated price
for delivery during some stated later month all
subject to the rules of the particular exchange
where the commodity is traded.

--or commodity exchange-- is a market organized
for the purpose of trading in futures contracts.









Hedging


Initial Margin


Job Lot


Long


Long Hedges



Maintenance Margin



Margin Requirement







Maximum Daily
Fluctuations


Minimum Price
Fluctuations


Open Contract



Position

Price Quotation






Round Turn


Scalpers


the use of futures contracts as a temporary sub-
stitute for a merchandising contract that is to
be made later.

funds deposited with a broker as security for
completion of a futures trade.

units smaller than one full contract used in the
trading of some commodities.

a trader is said to be "long" if he has bought
more contracts than he has sold.

purchases of futures made as a hedge against the
sale of the cash commodity. It is used for pro-
tection against a price rise.

minimum amount of money which must remain on
deposit during the life of a futures contract.
The amount will vary with the commodity.

each exchange establishes its minimum margin
requirements needed for commodity trading.
Normally, this ranges from 5 to 10 percent of the
value of the contract. A brokerage firm may not
ask for less than the minimum set by the exchange,
but can require more from a customer.


maximum amount the price can fluctuate above or
below price closing on the exchange the day before.


the smallest amount the price can change during
daily trading hours on an exchange.

a futures contract that has been entered into
and not liquidated by an offsetting transaction
or completed by delivery.

being either long or short in the market.

the price at which the particular contract is
selling. Bid is the highest price buyers are
willing to pay and "offer" or "asked" is the
lowest price for which sellers are willing to
sell.

the fulfillment of both a purchase and an off-
setting sale, or vice versa, in a futures market.

speculators who trade on very small changes in
prices and who end the day with even or close
to even positions.











Short


Short Hedge



Speculation




Spreaders




Straddle



Thin Market


a trader is said to be "short" if he has sold more
contracts than he has bought.

sale of futures made as a hedge against the purchase
of the cash commodity. It is used for protection
against a price decline.

in commodities it is the holding of a net long or
net short position, for gain, and not as a normal
incident to operating a producing, merchandising or
processing business.

speculators who take long or short positions in
the same number of contracts in different markets
or different futures in order to make a profit
from price changes.

the simultaneous purchase of a futures for one
month and the sale of a futures for another month,
either in the same or another commodity or exchange.

an inactive market involving a low volume of
trading and infrequent transactions.












REFERENCES


Anon., Will a Concentrate Futures Market Benefit the Florida Citrus
Industry? A study conducted by faculty members of the Harvard
Graduate School of Business Administration for Florida Citrus Mutual,
Lakeland, Florida.

Baer, Julius, B. and Saxon, Olin G. Commodity Exchanges and Futures Trading.
New York: Harper and Brothers, 1949.

Bakken, Henry H. Theory of Markets and Marketing. First Edition. Madison,
Wisconsin: Mimir Publishers, Inc., 1953.

Campbell, Donald A. "Trading in Futures Under the Commodity Exchange Act,"
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Commodity Exchange Authority, USDA, Trading in Maine Potato Futures,
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Florida Department of Agriculture and USDA, AMS, Statistical Reporting
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Gold, Gerald. Modern Commodity Futures Trading. Third Edition. New
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Hamilton, H. G., Love, Maxey, and Spurlock, A. H. Florida Cooperatives.
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Howell, L. D. Analysis of Hedging and Other Operations in Grain Futures.
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79





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