Weather Windfall

The Daily Reckoning PRESENTS: O.J. producers have had a terrible run all summer – and Hurricane Ernesto is poised to drive prices even higher. Kevin Kerr explains why, in this case, money might actually grow on trees…


I write about certain markets all the time, mostly because I love them and they make me big profits. One of those markets is orange juice. As a commodities trader, I’m always having to look to the future – not always years out, but often six months out. One market that always offers opportunity is orange juice. Whether it’s hurricanes off the coast of Florida or a hard freeze in January, juice can offer some good volatility for the trader looking to cash in.

Few markets are as volatile to trade as orange juice. 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 September 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…

You normally don’t think of the words ‘zero’ and ‘profits’ in the same sentence, but in this case, I mean exactly that. Forecasters project increasingly bizarre weather patterns, and that spells bad news for the citrus industry. The already deluged citrus crop in Florida has been hurt by two years of relentless hurricanes and disease; now I think it faces a tough winter after last year’s overly mild season.

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, these growers are breaking out into a cold sweat. What little crop has been able to survive this long could easily be lost with 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; O.J. 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 O.J. in the United States, 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 United States and Caribbean have affected orange crops in a big way. Some O.J. 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 O.J.

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. Commodity futures are the best vehicle to trade FCOJ, and options on the futures are even better.

The January 2007 orange juice (OJF7) is the best bet for a new entry, as it has plenty of time value and a fairly liquid options chain.


Kevin Kerr
for The Daily Reckoning
August 29, 2006

P.S. To learn more about orange juice, visit the New York Board of Trade Web site, at Or you can watch Kevin on CNBC’s closing Bell with Maria Bartiromo today from 3:10 pm – 3:15 pm (EST).

Editor’s Note: With 15 years of experience, Kevin Kerr is a true veteran of the commodities markets. A licensed commodities trader since 1989, he’s worked the trading pits in Chicago and New York with legends like Paul Tudor Jones, and he’s even traded commodity derivatives in London. Over Kevin Kerr’s career he’s dealt with everything from cotton to currencies to oil and natural gas.

“What’s that Hissing Sound?” headlines a piece in the Economist:

“The boom has lifted the (U.S.) economy in three ways: it has boosted residential construction: it has made people feel wealthier and so encouraged them to spend more; and it has allowed homeowners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America’s total GDP growth since last year.

“Counting construction, finance, and estate agency, the housing boom has been responsible for one-third of all the jobs created since 2001. If house-price rises level off, GDP growth could dip below 2% in 2007. If prices fall, expect a steeper slowdown.”

Since it is now in the Economist, it’s official – housing is in trouble. But will prices actually go down?

We have a report directly from one of the hottest markets in the country, south Florida:

“We just missed it. The time to sell was a year ago. A guy came along and offered us $500,000 for that place we bought. We paid $450,000 for it two years ago. Our timing couldn’t have been worse. We expected to tear down the house and build a new one…and we were sure we’d make a couple hundred thousand in profit. Minimum. But you warned us. And we didn’t listen. And then, we got that offer for $500,000 and turned it down. We thought we could get much more. But that was then and this is now…I’d be happy to get back what we have in it. But we can’t even get anyone to look at it.”

Paul Kasriel says it’s the worst supply/demand equation of residential real estate in 34 years. Sales in July were down more than a fifth. Inventories were up more than a fifth. And a lot of real estate investors are now going to the liquor store to get another fifth. They wish they could turn the clock back a few months and unload properties at last year’s prices.

But maybe the situation is not as bad as it looks. The New York Times reported the news last week that real estate downturns in England and Australia have been surprisingly mild. And now, Business Week has a big story entitled “Housing: The Roof Won’t Collapse On The U.S. Economy.”

According to Business Week, housing can go a little soft without damaging the economy too severely. That view has become the mainstream dream. What do we know; maybe it will turn out to be true. As our friend John Mauldin points out, we usually muddle through. Usually, tomorrow is like today. Usually, nothing too bad or too good…happens. Usually, things are average, ordinary, common, and regular.

But wait, there is nothing ordinary about this housing bubble. In the space of less than 10 years, according to Robert Shiller’s index, the real value of residential property doubled. And householders doubled up their debt, too. Neither are things that happen every day; in fact, they’ve never happened before!

We are not looking into a crystal ball here. We are just putting two and two together. If things are usually usual, then when they are unusually unusual, they are probably more likely to become usual again, rather than become more unusually unusual. That seems so obvious to us, we won’t bother to explain it.

And when housing prices become usual, then the poor sap who has bet his house on something extraordinary is likely to be in a tight spot. And since the entire U.S. economy, and by extension the entire world economy, depends on him being able to continue to spend, then they’re all in a tight spot.

Yes, the whole world economy now depends on a man who spends money he doesn’t have – money of no sure value – on what he surely can’t afford, and which he probably doesn’t need anyway. He can only do so as long as his house rises in price. And now, that the rise in housing prices has come to an end. What next?

Everyone has come to expect slowing real estate gains. The boom is over; everyone seems to think so. So, where is the surprise? Where’s the money to be made…or lost?

Again, we don’t know. But in August 1982, Business Week famously predicted that the equity market was finished. Now, in August 2006, BW tells us not to worry: the roof will not collapse. BW might not be right, but it might be consistent; the roof might blow up.

More news:


Ian Mathias, reporting from Charm City…

“Commodity spikes have inspired many Americans to invest in Hurricane Ernesto. Speculators around the nation have been betting on Ernesto to have a similar effect on gas and oil prices, but many experienced investors are steering clear of last-minute energy buys.”

For the rest of this story, see the Desidooru Saloon.


And more views:

*** Justice Litle fills us in on a new menace: air conditioning…

“U.S. electricity use has hit record levels as the nation endures a withering heat wave,” he reports.

“The Midwest in particular is broiling: Oklahoma City has broken the triple-digit barrier 17 times this year, and Bismarck, N.D., has gotten as hot as 112 degrees Fahrenheit. Nor have the coasts been spared. Naturally, this has us relying on air conditioning more than ever before – and environmentalists are sounding the alarm.

“Almost 1 kilowatt hour out of 5 is used to air-condition buildings in the U.S., requiring massive amounts of electricity and contributing to the burning of fossil fuels. As AC units keep indoors cool, they pump hot air outside, contributing to the ‘heat island’ effect in densely populated areas. On the roads, air conditioning sucks up an estimated 7 billion gallons of gasoline per year. The concern is whether our attempts to ‘beat the heat’ are making the heat far worse.”

*** Yesterday, we took an accidental holiday…from our vacation. It began when we rented a van to pick up furniture that had been left in London. The idea was to drive to London with Damien, our gardener-handyman here in France, pack up the van, and then let Damien drive it back to Ouzilly. But when we got to London and saw Damien driving on the wrong side of the street directly into the path of a shiny new Mini Cooper, our plans changed.

It started when we decided we had to move furniture, which seemed simple enough. But not easy. Ouzilly is a 10-hour drive to London, and we had to pack up the contents of a three-bedroom house. So, we enlisted the help of our gardener and handyman to help.

At 3:30 a.m., we rose from our bed, got into the van and set off.

“We have to get around Paris before the morning rush,” Damien explained.

“But it’s Sunday…there won’t be a rush hour this morning,” we protested.

“No,” Damien said, “It’s not the usual rush hour. But you wait. People are returning from their vacations and the highways will be clogged with people pulling trailers and with bicycles mounted on the back of their cars. It will be horrible. Besides, I hate Paris traffic.”

Damien took the wheel and we drifted off to sleep in the passenger’s seat.

All went reasonably well: the crossing of the English Channel through the Eurotunnel, the drive into London. We drove some of the way, but Damien did most of the driving. In London, Damien, who was a professional truck driver for 14 years, had a hard time adjusting to the left side of the road.

“Whoa, Damien! A gauche…A gauche!” we shouted.

“Merde! Why can’t these English people learn to drive on the right side of the road?” Damien yelled.

The little Mini Cooper slipped by…barely. We began to wonder about letting Damien go back alone. After so many years on the French highways, Damien is rather set in his ways.

Monday was a holiday in Britain. We had hoped to go to the office and send off a missive to you, dear reader, but the office was closed. We did what we could, but then we had to rush off to accompany Damien back to France.

The ride back was a pleasure. Since it was a holiday, no questions were asked at the Eurotunnel…no passports were shown. There were no delays. But around Paris, the traffic was heavy…going in the opposite direction.

“I hate Paris. I call it the ‘trash can’,” said Damien. “But since we’re here, let’s drive down to Orleans. There is a truckers’ restaurant there…it’s great. I haven’t been there in five years…but it is one of the best.”

We left the highway to find the restaurant and we were soon in a humble eatery packed with truck drivers. Most of them were speaking Spanish, we noticed.

“Yes…most of the truckers are now Portuguese or Spanish,” noted Damien. “Tiens…let’s have an aperitif.”

We do not associate aperitifs with truck drivers or truckers’ restaurants, but this is France. So, we downed a Kir and then sat down to lunch.

In London, we would have paid at least $60 for such a lunch – hors d’oeuvres, salad, steak, vegetables, cheese…dessert and coffee. The whole affair was served with such a big pitcher of red wine that it would have been enough for the whole Portuguese soccer team. The whole thing cost only 11 euros…or about 14 dollars.

We wondered how truckers could drink so much without driving off the road. The answer came with the coffee, so strong it was probably used to strip paint.

Finally, we got back to Ouzilly at about 8:00 p.m. We gathered all the children and unloaded the van.

“Well done, ” said Damien, “now let’s have another aperitif.”

The Daily Reckoning