Orange Juice Prices Ain't Nothing to Mess With

(Apologies to the WuTang clan for overtly sanitizing their lyrics in the title, but I try to keep this blog PG-13.)

A major freeze in Florida last week terrified Orange Juice hedgers and speculators alike, with March 2010 Orange Juice opening at 145.5¢ per pound on Friday and going straight up to 151.15¢ per pound to close out trading (always love those candle stick charts where the low is the open and the high is the close). In a scene that I have to imagine was reminiscent of the end of Trading Places, traders on the NYBOT awaited word of the damage from the weekend's deep freeze (Florida's citrus belt fell to temperatures below 25 degrees). When the damage was reported to be not as bad as feared, prices shot down this morning, with the last trade of the session for March 2010 futures at 133.1¢ per pound.

This is a classic example of when you should stay the hell away from a commodity unless you're growing/mining/smelting it yourself. Sometimes, you'll see prices go one way or the other because people were afraid that some specific news item might cause some people to anticipate other people acting in a certain way (or some other convoluted garbage). In these cases, you basically have a false or inflated premium built into the price (one way or the other). A great example of this is when computer models predict hurricane season six to eight months out. These models are not anywhere close accurate, yet prediction of a "potentially extreme" or "potentially calm" hurricane season inevitably sends Orange Juice prices way up or down, even though the weather itself (or lack thereof) has yet to do anything to the crop. However, the current situation is the exact opposite. America's oranges nearly froze to death over the weekend. If news post-freeze had turned out that Florida lost half it's crop, prices would have probably broken 170¢ per pound or more. Further, when the situation is this extreme, a lot of the activity in there is the result of action by the hedgers themselves. You know that a lot of Friday's movement had to do with Tropicana and various orange growers taking potentially losing hedging positions just to make sure they didn't go bankrupt if something terrible happened to the crops. Remember, the hedgers, not the speculators, are the reason the futures markets exist in the first place.

It's times like these when you're better served by waiting on the sidelines. Personally I'm just glad I'll be able to drink my morning juice next month.