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Latest Freeze Scare Highlights Supply Worries for Orange Juice

There was a time when cold weather in Florida would send Orange Juice prices soaring into the stratosphere at the New York Board of Trade. That was back when Florida was the largest orange producer in the world and provided nearly 100% of the oranges used for the juice that satisfied the futures contract at the NYBOT.
OptionSellers.com’s James Cordier discusses the effects of the Florida Freeze on the Orange Crop, CNBC, December 15, 2010. WATCH NOW

Not anymore. These days, Brazil provides the majority of juicing oranges for the New York futures contract. At nearly 2 ½ times the production of Florida, Brazil is now the world’s largest producer and exporter of oranges. Therefore, Florida freeze scares do not carry the weight they once did.
That point being acknowledged, Florida is still the world’s second largest producer of oranges, most of which are used to make Orange Juice. And as this week’s freeze in central Florida growing regions proves, threats to it’s production can still have an impact on price.
While a large swatch of groves were exposed to freezing temperatures this week, Florida was spared the “deep freeze” that was originally forecast. While some minimal yield loss is expected, the 2010 crop as a whole dodged a bullet.
And while weather speculators liquidated long positions this week, orange juice bulls may have good reason to see that as a buying opportunity. While Brazilian production has remained stable, Florida orange production has dropped sharply since a series of hurricanes tore through Florida growing regions in 2004, uprooting many trees (see chart below).


This week’s cold snap almost certainly means that the USDA will have to adjust their 2010/11 Florida Orange crop estimate down from it’s current 143 million boxes. A 5-10 million box reduction will have supply bulls wringing their hands, and make the crop even more sensitive to colder weather. And there is good reason to expect more freeze scares ahead. The Floridian winter is just getting started and freezes are much more common in January or February than in December. 
With a tight supply situation already, demand for Orange Juice on the rebound (it’s a health drink again) and a recovering US economy, our current opinion is the downside on FCOJ is limited – especially with the bulk of winter still ahead.
Puts can be sold far beneath this week’s lows for the May or July contracts. We advise using OJ puts as a “diversification” trade as opposed to building a base position here as OJ option volume can be “thin” at times. However, lower volume does not mean it can’t be a high percentage income producer. Fringe markets like OJ can be a great way to round out a well diversified option selling portfolio.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.