Thursday, September 11, 2014

OJ crop challenged

By Andrew Wilkinson

Commodity traders eye strengthening dollar

Commodity prices have been feeling the backlash of a strengthening dollar as of late, and investors it seems have become accustomed to the adage coined during the financial recession that the dollar is the least dirty shirt. With the ECB and BoJ likely to ease and the Bank of England first having to deal with the politics of potential Scottish secession, all eyes are on the safety of the dollar and the prospect of Fed tightening that could occur before most other central banks.

The rise in production of U.S. crude oil and tepid global recovery have weighed on the largest commodity market with WTI crude prices dropping close to $90.00 per barrel. The European benchmark contract of Brent crude closed below $100 per barrel for the first time in 16 months. The shift in focus from the Ukraine/Russia conflict has also resurrected risk appetite and dulled demand for gold, the price of which has also been negatively impacted by a stronger greenback.

Crop prices have suffered as well, with traders assuming ample supply on the horizon. Generally speaking, the luster of trading commodities has somewhat dissipated on account of the dull global recovery, settled weather conditions and most recently on account of weakening appeal of prices typically favored during times of dollar weakening. But perhaps orange juice futures are getting off lightly – or at least relatively so. Forget the rain, says commodity analyst Judy Ganes. “Florida citrus growers have more on their mind than the amount rain they are getting as the fruit has been dropping prematurely from their trees and their production is dwindling rapidly,” she notes in her latest Monthly Softs Fast Facts publication. Despite little impact from this year’s hurricane season, the market already knows that supply is dwindling and that next month’s USDA crop report could reveal further shrinkage. But watch out, notes Ms. Ganes.

Chart – Speculators looking for OJ to follow crude or gold rather than fundamental supply woes

The tail-end of the hurricane season is usually the most active time period for storms to develop, while “a cold snap in the winter would deal another blow to struggling growers since Florida orange production is already forecast to fall to a near 50-year low”. The loss of appetite amongst OJ speculators is apparent in the above price chart, which also shows the net speculative position held by investors.

Typically, they play from the long side in hopes of benefitting from a squeeze when hurricanes strike and decimate production. You can easily see that speculators together rarely get net short of this market, but they may be heading that way according to the latest data. That could prove rather interesting in the event that weather patterns – rain or freezing temperatures – weigh further upon supply.

Initial claims

The latest labor data missed forecast, with 15,000 more claims than expected at 315,000 through the last weekend. It is not a bad number, simply because the recovery in the labor market (using this measure at least) has come full circle. Numbers of around 300,000 are just what the economy was used to prior to the recession and it is possible we will not see continually declining initial claims data.

The four-week moving average remains close to that line in the sand at 304,000 and its stability should be the focus going forward. The Labor Department did note that even though it did not estimate claims data for any states in the latest week, the Labor Day holiday might have impacted the overall reading. Nothing to see here; move right along.

Chart – Initial claims and four-week moving average

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