Orange Juice Futures: We're Buying

Have orange juice futures finally found a bottom? May orange juice futures gained nearly 10% this week, on speculation that drought conditions in Florida could damper yields.

As you can see, OJ has been in free fall over the past 14 months, dropping roughly in half from peak to trough.

Prices appear to have been forming a bottom since the beginning of the year, and in surging past the 85 cents-a-pound level, May orange juice futures hit four-month highs.

So is it time to buy? Let's break it down.

Bullish factors for OJ:

• Renewed weakness in the US dollar could buoy commodity prices
• Dry conditions in Florida could hurt supply
• There are reports of a weaker orange crop in Brazil
• The technical setup looks quite good

Bearish factors for OJ:

• The deflationary environment that sent almost every asset down 50% last year may still be in place
• Good news on the Florida crop could cause this rally to quickly reverse course
• OJ may be overbought and due for a short term pullback

OJ futures are quite volatile, so proceed with caution if you're new to trading them. Contract sizes for OJ futures are smaller than most other softs, so I'd recommend starting with a light position and keeping wide stops to ride out potential swings.

Bottom line: At current price levels - which are historically cheap - the risk/reward of a long position in orange juice looks quite attractive. We've been watching all of the softs closely, and OJ looks the best right now from a technical and fundamental standpoint. We're buying this 3-month breakout.

Disclosure: Brett is long 1 July Orange Juice contract as of 4/8/09 at 81.95.