Commodity Trends: Profit From Orange Juice

Includes: DBA, FUD, JJG, JO, NIB, SGG
by: Kris Rymer

"Orange Juice rallies to five-month high on Florida frost damage." This from a Bloomberg article out last week on January 4th, when OJ futures were still trading at $1.7805 a pound.

Prices had rallied 9% in the last two weeks leading up to January 4th. So, what's the price of Orange Juice now, after that big runup? $2.0750.

Another runup of 16.5%, trading limit up today.

So, what's the cause for this sudden rise in O.J. futures prices? Many people will argue that prices are rising due to seasonal fundamentals, such as the winter cold snap that typically affects the orange crop this time of year in Florida. But, Brazil produces twice as much of the fruit as the entire United States.

Clearly, there are more forces at work in the markets than seasonal fundamentals. There is no way to predict how the price of Orange Juice will behave in the future. The best predictor of tomorrow's price is today's price.

As a result, investors have the best opportunity to increase their capital by reacting to, and following, the market rather than attempting to predict where it will go. We call this Trend Following. Cut your losses but follow the trend when it moves with you. However, this is easier said than done. Investors and traders themselves are arguably among the biggest challenges to success in trend following due to the Endowment Effect, among other reasons. The Endowment Effect essentially states that we place more value on losing positions than winning positions, and that we value those positions even more when they belong to us.

So, agreeing that trend following can help your returns as an investor, how can you participate in moves such as that in the Orange Juice market recently?

Fortunately, many ETFs and ETNs are available for commodities traded on futures exchanges. Below are some examples:

  • FUD: UBS E-TRACS CMCI Food Total Return ETN (2.5% holdings in O.J.)
  • DBA: PowerShares DB Agriculture Fund
  • JO: Dow Jones-UBS Coffee ETN
  • SGG: Dow Jones-UBS Sugar Total Return Subindex ETN
  • NIB: Dow Jones-UBS Cocoa Total Return Subindex ETN
  • JJG: Dow Jones-UBS Grains Total Return Subindex ETN

Unfortunately, there are no good vehicles in ETFs, or otherwise, to track futures prices in the orange juice market. In these cases, we recommend using the futures market itself to gain exposure.

Disclosure: I do not hold any stock, ETF or ETN positions in any securities listed above, and I do not intend to do so in the next 72 hours. However, I do hold positions in Orange Juice futures contracts.

Note about using ETFs and ETNs: These investment vehicles do not necessarily have 100% correlation with the underlying commodity or its futures contract. Furthermore, it is important to understand the structure of ETNs as they have certain additional risks.

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