Possible Florida Freeze Drives Orange Juice Futures Limit Up

Posted Jan 5th 2010 12:30PM by Connie Madon
Filed under: International Markets, Forecasts, Products and Services, Industry, Competitive Strategy, Market Matters, Economic Data, Commodities, Headline News, Agriculture

The orange crop in Florida is especially sensitive to freezing temperatures. Cold air masses have been flowing down through the U.S. into Florida with no warm air buffers to stop them. These cold air masses are scheduled to last throughout the week.

The Florida Citrus Mutual trade association warned growers on Sunday that an overnight freeze could damage crops. It said: "We could have cold or borderline temperatures each night over the next week. It'll be an anxious seven days for us."

The Florida orange crop is the second largest in the world. This year, the U.S. Department of Agriculture estimates that the crop will be down 17%.

Not only can the present crop be damaged, but the flowers that produce next year's crop could also be destroyed.

Against the backdrop of this news, the market opened sharply higher and went "limit up." Some, but not all futures contracts have a daily limit within which the contract can trade. For orange juice, the limit is 10 cents, up or down from the previous day's close. The March futures contract on the ICE traded up the 10 cent limit to $1.3905 per pound. When a contract trades limit up the market stops trading. During the trading halt, incoming orders are matched. If there is enough selling the price backs off from limit up. In this case the price dropped off to $1,3640 per pound.

One of the most dangerous aspects of trading commodity futures is the limit up move. Often a market can close limit up and open limit up for several days. If you happen to be short the market in this event, you cannot buy back your position. Your losses can be staggering. Only when the market trades below limit up can you buy back your short position.

We must keep in mind that trading commodities is a zero-sum game. By that we mean that after a set period, usually three months, the longs and shorts are matched. Speculators who do not want to take delivery of the product clear out their positions, leaving only those who are taking delivery of the product. On the last trading day all the longs and shorts are matched to zero and the contract ends. In this case the shorts (sellers) deliver the orange juice to the longs (buyers) who accept delivery at a specified location.

Coming back to the winter freeze conditions, the extent of any damage to the crop will determine the price. If the crop is damaged, companies which need juice for resale will buy regardless of price, often driving the price to very high levels. As you might guess, these price increases are then passed on to the consumer.

Would you buy orange juice futures contracts for speculation under the present conditions?

Tags: citrus production, commodities trading, Florida Citrus Mutual, inthenews, limit up, orange crop damage, winter freeze