U.S. orange juice futures surged almost 11 percent to an all-time high on Tuesday, after U.S. health regulators announced a clampdown on imports from top producer Brazil following the discovery of small doses of a fungicide that is not approved in the United States.

Fears that more than a tenth of U.S. supply could be abruptly cut off, alongside concerns about the impact of a brief freeze in Florida last week, triggered a frenzy of short-covering in the tiny market, threatening to spur a rise in retail prices and crunch margins for brands like Pepsico Inc's

Tropicana and Minute Maid, from Coca-Cola Co .

If we take Brazilian OJ out of the market, it has not reached its peak certainly. We're in uncharted waters, said James Cordier, president of Tampa, Florida-based Liberty Trading Group. We lost oranges on the freeze last week but this certainly trumps that.

The benchmark March frozen concentrated orange juice contract on the ICE Futures U.S. exchange -- one of the smallest futures markets, which achieved fame in the 1980s movie Trading Places -- jumped the 20-cents daily limit to $2.0775 at 9:46 a.m. EST, taking two-day gains to nearly 17 percent.

The most-active March contract was already trading up between 3 and 4 cents at $2.10-2.12 per lb in synthetic options trade, said Bill Raffety, senior analyst for commodities futures brokerage Penson Futures in New York. A near doubling in ICE exchange margins announced after the close of trade could also spur more covering by traders who are short.

The latest surge came after the Food and Drug Administration told juice makers that it would step up testing for the fungicide carbendazim, which is used in Brazil to protect against black spot but is not authorized for use in the United States. FDA said it would block imports that tested positive.

The investigation was prompted after a juice company alerted the FDA to the discovery of low levels of the substance in orange juice sold in the United States. It was unclear how much juice could be affected. The United States imports about a quarter of its supply, with Brazil accounting for nearly half of all frozen and fresh OJ imports, according to government data.

Brazil has been using the fungicide for more than 20 years to fight blossom blight and black spot, a type of mold that grows on orange trees, and shipments have never been stopped before because of the fungicide, said Christian Lohbauer, spokesman for CitrusBR, which represents Brazil's four main producers.

Any shipment (of orange juice) will test positive, he said. I don't know what is the level that they will decide is the maximum level, he said.

RALLY EXCEEDS HURRICANE-INDUCED HIGH

The front-month January FCOJ contract, which expires Tuesday, was at a record high of $2.12, according to Thomson Reuters data. This rally exceeds the one that caused prices to rise four-fold in 2005 and 2006 after a series of hurricanes slammed into Florida and battered the crop, spreading diseases such as citrus greening, which is fatal for citrus trees.

We could see that ($2.12) and a bit more to the upside tomorrow at the open. From there I am not sure, but if the testing expands and traces of the fungicide are found on a wider search the market will likely run on the additional news, said Raffety.

The drop in domestic production -- citrus output from Florida dropped by almost 40 percent between 1996 and 2010, according to USDA data -- could exacerbate the problem, even as U.S. consumption declines overall.

Analysts said the freeze that hit Florida last week had done only minimal damage to the crop. Meteorologists said on Tuesday that there was no further sign of harsh weather on the horizon in the No. 1 growing state. Prices rose nearly 8 percent last week on the freeze, but appeared to have cooled by week's end.

Country Hedging Inc analyst Sterling Smith said there was some nervousness about the freeze ahead of the U.S. Agricultural Department's monthly supply/demand report on Thursday when the next Florida 2011/12 citrus crop estimate update is released. But others saw little cause for alarm.

We experienced a little bit of damage. It was by no means catastrophic. We had some cold pockets across the state that had some burned leaves, maybe some twig damage, some reports of slush ice, said Andrew Meadows, a spokesman for Florida Citrus Mutual, the state's largest growers association.

Beyond the fundamentals, some traders attributed the price spike to a possible market squeeze, with short-sellers scrambling to cover their positions ahead of a possible shortfall in supplies. Trade was almost completely concentrated in the March and May contracts.

That squeeze was likely to intensify after the IntercontinentalExchange said it would raise the initial margin on speculators' positions by 95 percent to $3,600 per contract -- a predictable measure given recently volatile trade but one that will dramatically increase the cost of maintaining loss-making shorts, potentially forcing short traders to liquidate by buying back positions.

The orange juice market is particularly susceptible to dramatic volatility due to its tiny size compared with oil and other major commodities. Trading volume for March on Tuesday was just 2,330, an average day equivalent to about $35 million in nominal value. Total open interest was only about ten times that.

ICE Futures U.S. exchange data showed that its open interest -- an indicator of investor exposure in a market -- stood at around 25,000 to 30,000 lots, about 5 percent of the open interest in the raw sugar market of nearly 600,000 lots.

The most heavily traded day in the orange juice market would be 6,000 or so lots, the exchange data showed, and pales in comparison to the more than 100,000 lots traded in sugar several times over the past year.

There are still opportunities to be had. Anyone with a position on January 3 has watched prices jump 23 percent in the first six trading days of the year.

Some with a longer-term view may choose to take some profit after the run-up.

After becoming friendly to OJ in the third quarter based on falling output from Florida, Cordier said he will exit his position some time this week.

(Reporting By Josephine Mason and Rene Pastor, additional reporting by Thomas Brown in Miami; editing by Andrea Evans and David Gregorio)