Orange Juice And Freight Markets, Married In The Church Of Commodities Volatility

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 |  Includes: DRYS
by: MetalMiner

By Taras Berezowsky

We couldn’t resist taking another opportunity to highlight an interesting story that shows just how fickle — and kind of hilarious — commodity volatility can be. (Yesterday my colleague Lisa outlined what Twinkies have to do with commodity volatility.)

First, let me start you off with a question: what do orange juice and Capesize freight have in common?

Answer: not much. Except for one small thing: you could’ve made tons of money as a savvy investor from the relationship between the two on the commodities markets.

According to Jack Farchy writing in the FT’s Commodities Note recently, “anyone who started the year with a trade on the relative performance of orange juice versus Capesize freight would already be up a cool 96 per cent.”

This is somehow possible because, as Farchy outlines in the article, in the first six business days of January, orange juice futures rose 26.4 percent while the Baltic Exchange’s index of Capesize freight fell 35.7 percent, creating an arbitrage opportunity of sorts between two vastly different markets.

Essentially, you’re shorting one and going long on the other, and the trade difference is the actionable part of the deal that results in record returns.

The spike in orange juice futures, of course, comes from the one-two punch of Florida (cold snap caused worries over a short growing season) and Brazil (a fungicide strike in the world’s largest OJ export market), as our sister site Spend Matters mentioned earlier this week.

In terms of Capesize freight, conditions are mirroring 2008. There is a glut of ships carrying iron ore and other cargo into Chinese ports — underwhelming demand (Lunar New Year is on the horizon — party!) and previously long offload wait times getting shorter are the culprits.

The Baltic Dry Index (BDI) has fallen 25 percent since the 2011 ended:

Click to enlarge

Source: Wall Street Journal

So, making big bucks on volatile commodity markets can be pretty juicy (couldn’t resist), provided you can sniff out and pounce on the opportunities. But losing big bucks due to commodity price swings is a much bigger concern for buyers. That’s not so hilarious. And traditional hedging just might not stop the bleeding.

Oil markets are dependent upon fears of potential Iran strait closures and ensuing sanctions, and natural gas prices are at the whim of oversupply issues. And metals producers are at the whim of all sorts of raw materials price inputs, which could spike or crash at any moment.

This is the new normal, indeed.