Why Orange is Green: LONG AND SHORT
By Kevin Kerr
I like drinking orange juice; but I love trading it more.
This futures market provides lots of year-round volatility,
which means lots of opportunity to make money...or to lose
it. Few markets are as volatile to trade as orange juice.
Whether due to hurricanes off the coast of Florida during
the summer months or to hard freezes during the winter
months, juice prices bounce around throughout the year.
Many years ago, as a young lad of 21, I worked in the
orange juice futures pit in New York. Actually, back in the
late 1980s, the orange juice pit wasn't a pit at all: It
was what we call a "ring." The reason it was called a ring
was there was a wooden circular ring that everyone leaned
on and yelled across, rather than a pit you climbed into
and yelled across. It was similar to a boxing ring in more
ways than one.
Anyway, it was a very fast moving and volatile market.
Today, juice is still fast moving, but the volatility has
smoothed somewhat as the futures have grown and matured and
trading volume and liquidity have increased significantly.
Juice trading used to be done on the old New York Cotton
Exchange (NYCTN), which was located in the World Trade
Center prior to Sept. 11. Today, frozen concentrated orange
juice (FCOJ) trades on the New York Board of Trade (NYBOT),
which was created when the former Coffee, Sugar and Cocoa
Exchange merged with the NYCTN.
Back when I was in the juice ring, a wise old juice trader
once told me, "Never be short orange juice in January." And
I never have been. Here's why...
This winter, the mercury could drop significantly in
central and south Florida, and with the mounting problems
already facing citrus farmers from the last couple of
years, growers enjoy no margin of safety. The already
deluged citrus crop in Florida has been hurt by two years
of relentless hurricanes and disease. Therefore, the groves
that have managed to survive the last two years could
easily lose their fruit in the first hard freeze.
I like to see things firsthand — I learned to do that from
some of the old-timers I traded with at the beginning of my
career. They had the attitude that you needed to get out
there and see the condition of the actual commodity
yourself.
So that's exactly what I did right before and after the
hurricanes over the last couple of years, and I am doing it
again this year. What I found was fruit that is subpar and
damaged, on and off the ground.
Citrus canker, a disease that destroys the orange crop and
is spread by wind-driven rain, has taken a severe toll on
the crop, to say the least.
If you ever saw the comedy Trading Places with Eddie Murphy
and Dan Aykroyd, then you know the power of the crop
reports. While the movie is highly exaggerated, it is based
on some truth.
Make no mistake; OJ is a weather-driven market. A
hurricane, or even the threat of one, or a hard freeze in
central Florida can send this market reeling. Often, a
smart way to play this market is by using the famous "buy
the rumor, sell the news" strategy. Florida is the
epicenter of OJ in the U.S., and traders keep a close eye
on all weather patterns affecting the region. And so should
you. By the time weather actually hits the crop, it's too
late to buy.
Orange juice will almost certainly see its price soar as a
result of the recent U.S. hurricanes and impending cold
winter. In the last two years, various soft drink and juice
analysts have warned that the cost of juice and citrus-
based soda could surge 25% or more.
Bottom line: Hurricanes and strong winds in the U.S. and
Caribbean have affected orange crops in a big way. Some OJ
bears are saying that retailers will be able to contain the
costs within their existing prices, but I hardly think so,
given the depth of the damage. Consumers should prepare
themselves for substantial price rises. Europe could be
especially hard hit. U.K. consumers drink about 1,200
million liters of fruit juice a year, and 70% of that is
OJ.
Commodity futures are the best vehicle to trade orange
juice, and options on the futures are even better. The
January 2007 orange juice (OJF7) future is the best bet for
a new entry, as it has plenty of time value and a fairly
liquid options chain.
Money may not grow on trees, but oranges do, and this year,
being long orange juice futures, or options on juice
futures, could be as good as money. |
