Follow the Money: Hurricanes and orange juice futures

[shiggy11]

Huge amounts of money are won or lost speculating in the equity, currency, and commodity markets. A few trading days before 9-11, there appeared to be greater than normal trading activity in the equity put options of American and United Airlines. The unnamed parties that bought the puts before 9-11 were betting that the underlying stocks of those two companies would go down. They were, of course, correct in their judgment. What reasoning was used to place those positions? Was it pure luck, a hedged trading position, or simply a case of technical or fundamental analysis?

The state of Florida is being threatened with its second major hurricane within a span of 22 days. Florida is the No. 1 state in the US for growing oranges and is No. 2 in the world after Brazil (http://www.funandsun.com/1tocf/agriculture/oranges.html). On August 16th, three days after Hurricane Charley blasted its way across Florida, OsterDowJones News estimated that the state's citrus industry may have lost about 8% of its crop due to Hurricane Charley, but that existing inventories and the new Brazilian crop would be sufficient to offset the anticipated loss (http://www.dailyfutures.com/softs/).

On September 4th, as Floridians evacuate and brace themselves anew for the expected assault by Hurricane Frances, the Associated Press publishes a report by Mike Schneider that is titled, "Storms Could Destroy Florida Citrus Industry" (http://hosted.ap.org/dynamic/stories/F/ ... TE=DEFAULT). If that premise turns out to be true, shouldn't we expect to see a sharp rise in orange juice futures prices in the wake of the hurricanes?

From April 2003 until late May 2004, orange juice futures on the New York Board of Trade underwent a gradual but steady decline. Using the September 2004 futures contract as our base example, orange juice futures fell from a high of 105.50 cents a pound to a low of 56.60 cents over this period. The market then experienced a brief run-up that peaked at 72.80 cents on July 26th, most likely, due to trader expectations of a freeze of the Brazilian crop. Subsequently, prices fell, trading as low as 57.85 on August 6th.

Hurricane Charley roared across Florida on Friday, August 13th, a week after the interim market low. What were the price changes in orange juice immediately preceding and following August 13th?

Aug 10th: High 63.60 Low 61.50 Close 61.70 no change Volume 1153
Aug 11th: High 62.10 Low 61.40 Close 61.60 -0.10 Volume 896
Aug 12th: High 60.90 Low 58.75 Close 60.00 -1.60 Volume 2268
Aug 13th: High 63.50 Low 59.30 Close 62.25 +2.25 Volume 2475
Aug 16th: High 72.25 Low 68.75 Close 69.50 +7.25 Volume 7985
Aug 17th: High 70.00 Low 67.00 Close 67.45 -2.05 Volume 4093
Aug 18th: High 69.50 Low 67.60 Close 69.00 +1.55 Volume 7124
Source: Great Pacific Trading Company (http://www.gptc.com/charts_quotes.htm)

What's interesting to note here is that orange juice futures FELL during the two trading days immediately prior to August 13th. Speculators who assumed long positions in the futures contract on either of those trading days and held them until the following Monday were rewarded with an opportunity to close out their positions with a tidy profit.

Now let's fast forward to today, with Hurricane Frances emerging ominously from the shadows. How have orange juice futures traders been reacting to the news?

Aug 31st: High 74.30 Low 72.50 Close 73.50 -0.10 Volume 3927
Sep 1st: High 77.30 Low 74.75 Close 77.30 +3.80 Volume 6207
Sep 2nd: High 85.00 Low 78.50 Close 79.40 +2.10 Volume 7111
Sep 3rd: High 77.00 Low 74.00 Close 74.35 -5.05 Volume NA

Even though the long weekend is upon us and there is uncertainty about the strength and path of the current storm, orange juice futures prices fell sharply on the last trading day of the week, erasing most of the gains of the preceding two days. It remains to be seen how futures traders react on Tuesday of next week; will those who took on new long positions on September 3rd be rewarded with a quick profit opportunity, just as they had with Hurricane Charley? Stay tuned.

[shiggy11]

Did Hurricane Jeanne cause extensive citrus damage or at least the appearance of same? Apparently so, as investors, speculators, and commercial interests have pushed orange juice futures sharply higher in today's trading. As of 11:29am EDT, the November 2004 futures contract was trading at 85.10 cents per pound, up 6.35 since Friday's close.

http://sites3.barchart.com/pl/gptc/default.asp

[Guest]

I don't drink orange juice anyway because it's too expensive to begin with. But do you think the cost of my vitamin C's will go up?

[shiggy11]

My gut feeling is that manufacturers will use other sources besides Florida oranges to produce Vitamin C supplements, so I don't expect to see a major price hike at the retail level. It's my understanding that Brazil leads the world in orange production, and that the state of Florida is ranked #2. Until the recent hurricanes, orange juice futures prices in the U.S. had been in a steady decline for the past year due to excess supply of concentrate from previous growing seasons.