How to profit from trading frozen orange juice
Hurricanes affecting the South-west coastal region of the United States in 2008 brought significant consequences for several commodities that rely on production capacity to ensure steady supply. One such commodity where production and supply is tied in heavily to weather conditions, and therefore affects price, is Orange Juice.
Orange Juice is traded on the Intercontinental Exchange (ICE) with the underlying form of the commodity being Frozen Concentrated Orange Juice (FCOJ). Approximately 98% of the US orange crop comes from Florida, the world’s second largest growing area, and given its location in a region seasonally battered by tropical storms and hurricanes, the geographical concentration of producers can send the market into over drive in the event of irregular weather patterns. Given this, the FCOJ market experiences extreme levels of volatility (as you can see from the price history graph below) that allows traders to capitalise on opportunities presented by short-term fluctuations, if they are making well-informed investment decisions.
Therefore the FCOJ futures market constitutes one of the purest ‘weather’ plays, in that the weather is the primary fundamental driver and speculative capital typically flows into the market as a result. Fluctuating climate has even influenced trader sentiment and analysis to the point where discussions have emerged around whether forward FCOJ futures contract prices could be somehow tied in with traditional meteorological reports to create more accurate weather forecasts.
While this may seem hyperbolic, it is a testament to the extent to which weather conditions naturally affect a range of agricultural commodities. Further, if the second largest growing area for FCOJ happens to lie in one of the most intensely hurricane affected regions, then it is no surprise to see investors building in a supply-risk premium, or eschewing that same premium, depending on the perceived path of a tropical storm and its subsequent impact on supply.
FCOJ – 2 year price history
Disease is certainly another factor worth examining in relation to market dynamics for FCOJ as an extension of, and addition to, weather patterns.
As well as drenching affecting crop output, for example the 30 inches of rain fall in some areas during tropical storm Fay in late August, Citrus greening or Yellow Dragon disease reduces production and kills trees placing it top of mind for growers and traders alike. For analysts such as Elizabeth Steger, founder of Florida based, Citrus Consulting International Inc., Citrus Greening is a serious concern and one that (when accompanied by a general slowing in demand for Orange Juice in the year to date and fluctuating US dollar) will lead to a decrease of the imminent October harvest by up to 12% from the previous year.
Given the importance of the weather, traders have been keeping their eye on the weather developments in the Atlantic basin and the Caribbean and are scouring weather reports with the hope of gleaning some new information about weather formations and the likelihood of conditions impacting the FCOJ market fundamental’s status quo. Traders can look at forecasts, such as the simplistic representation below, in an effort to ascribe both a timeframe and severity of looming low pressure systems.
Tropical storm 5-day forecast map
Source: the weather underground Inc.
This situation is best analysed by real market behaviour. For example, as reports Hurricane Ike moved into the Florida Orange growing region, we saw the price of FCOJ jump 4% in intraday trading on Friday, following a four week rally. A few days later, that rise had been stripped away as the perceived threat diminished and the market discounted the risk to Florida. The fall was the largest in approximately 9 years, as traders saw the market come back 8.9%.
Given a volatile backdrop for global financial markets, for any commodity price discovery is not as clear cut as a simple correlation with weather patterns (or other fundamental market drivers) and price. For the situation when prices rose, speculative buying on the back of weather conditions did buoy prices, however there were technical elements influencing trader behaviour as prices travelled though moving averages resistance, sparking a short-term buying trend. Then as the threat dissipated a broad sell-off occurred, placing substantial downward price pressure as speculators exited their short term positions.
Whilst for FCOJ investor sentiment is primarily underpinned by the effect of weather on market fundamentals, current market instability has been attributed to speculative trading positions and a broad-based commodities sell-off as the bears come to the fore.
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