Orange juice volatility, not what you think

Trading Places (Image via RottenTomatoes.com)

by Arthur Field

It is New Year’s Eve. The Harrisburg Express speeds from Philadelphia to New York City. It thunders down the rails carrying passengers Inga from Sweden, Naga Eboko from Cameroon, Lionel Joseph, an Irish priest, a gorilla and Beeks, with his briefcase. The case contains the crop report for orange juice.

Possibly every single reader of Futures can remember every major scene from the iconic movie "Trading Places." Indeed, it made many of us take up trading futures and commodities. We’ve all likely said some variation of the great line: "Pressure? Here it’s kill or be killed. Make no friends and take no prisoners. One minute you’re up half a million, the next — boom! — your kids don’t go to college and you’ve lost the Bentley!"

"Trading Places" culminates in a wonderful scene in the frozen concentrated orange juice futures pit in New York. Back in the old days, all trading was pit trading. It was hectic and exciting. How exciting? There were times in the 1980s when, in an effort to get an edge, the runners were on roller skates.

The upshot in the movie was the main characters, Winthorpe and Valentine, waiting until Wilson drove the price of orange juice way, way up. They then sold into the market, the Secretary of Agriculture announced the real crop report and the price plummeted. Our heroes cover their shorts and make millions, putting the Dukes into the poorhouse at the same time. It’s a fun story that defined trading for a generation. The movie never gets old.

It also has some good lessons, particularly for the orange juice trader. One topic is the issue of volatility and some widely held beliefs. Does orange juice really swing wildly in January because of the crop report? More important, if such volatility does exist, can we use it to our benefit?

To answer these questions, the monthly range of orange juice prices was recorded starting with January 1996. The monthly range is defined as the high price of the month minus the low price. The closing prices were disregarded for the purposes of this test. Through Nov. 30, 2011, there were 191 pieces of data. The highest trade during the sample period was $2.0940, observed during the month of March 2007. The lowest price paid was $0.5420 in May 2004. The range of the orange juice contract, therefore, is $2.095 – $0.542, or $1.553. In percentage terms, the high is an increase of 286.7% over the low price.

In performing this test, it is important to make uniform comparisons. A 10¢ range with a low of 70¢ is not the same as a 10¢ range when the market is trading at $1.65. The former is a 14.28% range, which is far more volatile than the 6.06% range of the latter. Consequently, all of the range values were converted into percentages by dividing the range by the low price to normalize them across the sample universe. With these data, it now is possible to construct a meaningful statistical test.

If the calendar plays a significant role in orange juice price volatility, we would expect certain months to have much more volatility than others. To test this, we use an Analysis of Variance with an F-test statistic. The null hypothesis is, there is no effect.

For those whose statistics knowledge is a bit rusty, the F test examines different dependent values and assumes there is no significant difference between them based upon the observation of independent values. In other words, all of the fixed variables (that is, the different calendar months) will produce essentially the same dependent observations (that is, the average volatility during the month). The null hypothesis of the test is there will be no statistically significant difference between the mean volatilities of any of the months. The alternate hypothesis is that, yes, there is. Although the F statistic measures the variance, if the variance is low, it follows the means are essentially similar. If the variance is high, the mean volatility must be significantly different among the 12 months.

The Analysis of Variance test has 12 independent variables and 16 observations in each month. (Although December is missing for 2011, it is easy to perform this slightly unbalanced test using any statistical software package.) The F statistic will have 11 and roughly 180 degrees of freedom. This is a powerful test for discovering patterns, and we can have much confidence in its results.

The average volatility for each month is shown in "O.J. monthly" (below). The results of our Analysis of Variance test was p<0.00001. Essentially, there is virtually no significant chance that the means of the months are equal. We can conclude with great confidence that the calendar does indeed play a major role in the average volatility experienced in the orange juice market over time.

Click to enlarge

It is essential to realize that this does not prevent high volatility from taking place in any month. The test simply compares the averages and finds there is more variation between the months than within the given months.

In a blow to Hollywood, and perhaps running against the assumptions of most orange juice traders, the "Trading Places" months of December and January were not the top of the volatility list. Examining the table, it is easy to discern that October, August, January and December experience greater than average volatility, but October is much higher than December. Those four months account for 17.17% of the volatility of the orange juice market.

March, April and November are relatively quiet months by comparison, experiencing only 12.3% of the volatility. It may be concluded that the best trading opportunities are likely to be presented when volatility is greatest. It might also be concluded that the greatest risk occurs at those times as well. Short-term traders might find lots of trading opportunity in orange juice during October or August. March and April may be too quiet, but also present less risk.

On average, volatility throughout the year is 14.64%. As a side note, we can examine if extremely low volatility has been a harbinger of any movement. Indeed, it turns out it is, statistically speaking. When volatility in any month dropped below 7.25%, the market often changed direction within the three months thereafter. Often, the low volatility immediately preceded a major market shift.

For example, in December 2006, the monthly low was $1.96 and the high was $2.0940 (see "Calm before the storm," below). This range of 13.4¢ was only a 6.8% swing for the month. Given December is expected to be a pretty wild month, the volatility was less than 45% of what we might normally see. January 2007 saw a major drop in the market, with volatility falling to 13.35%. The all-time high was hit only two months later in March 2007, and then the orange juice market dropped precipitously, falling to $1.1060 in the next six months.

Similarly, in April 2004, the volatility dropped to 4.42% and the market low for the month was $0.5580. The following month, orange juice bottomed at $0.5420 before beginning its wild climb into the 2007 high. Several other examples of such predictive low-volatility activity may be found.

The lessons of the orange juice market may be extrapolated to other markets and shorter time frames. The trader easily can test different hours of the trading day to see if certain periods present higher volatility than others. Similarly, it may be tested to see if sudden contraction in the range of any time bar vs. its historical norm predicts a sudden change in market direction. After all, the goal, as Valentine and Winthorpe say at the end of the movie is: "Looking good; feeling good!"

See the original article >>

Orange Juice Futures sweetness fall on market uncertainties

by Commodity Online

Orange juice prices have been on the rise for the last two years, expanding almost 150 percent, as bad weather conditions affected outputs of major orange producing nations. Besides the fact that orange juice prices almost tripled, price movement was noted to be inside the range the markets have observed for the last 25 years, noted a report from RaboBank.

The worry, however, is not only affiliated with rising prices, but the structural changes happening in the market that could render the price inflation of orange juice permanent.

The price rise was mostly due to the fall in production in Sao Paolo and Florida in 2010, but expectations of a rebound in production this year, although too early to tell, is sure to bring prices down.

Declining ProductionHowever, a continuously falling production, which fell 50 percent since 1999 in Florida, is one of the focal points of the issue, according to the report from Rabobank. The traders are wary, and expectations that the market will reverse once it neared the upper ceiling of the range, inside of which prices have been trading for 25 years, is low.

The report also showed that availability of concentrated orange juice declined to the lowest in 10 years in 2010.

Cultivation of oranges depend on the acreage, trees per acre and yield per tree, all of which is reported to have remained more or less the same in Brazil and Florida, the report from Rabobank says. But the acreage is falling continuously in Florida and is a serious source of concern.

Cost PushRising labour charges, increasing spending on fertilizers and diseases have compounded the cost to produce oranges. But higher yields protected farmers earlier from such increments in cost. However, that ceases to exist now as the yield largely remained flat since 1991. This exposes farmers to price fluctuations, Rabobank report shows.

Fertilizers have also contributed a great deal to the cost, although prices have fallen of the late, but remains to be higher than 2003/04 levels.

The cost of producing oranges during 2003/04 were only at 0.60 for delivering oranges at a processing plant in Brazil, which has now increased to 0.90 for 6.8 kilograms of orange, the report cites.

Cost pressures and the volatility in orange prices have stressed the value chain, resulting in farmers benefitting little from the system. These lead farmers away to other sources of revenue such as sugar cane cultivation. Planting new trees have also resultantly declined, greatly contributing to the loss in output. The report from Rabobank states Florida Department of Citrus (FDOC) estimation that production of the fruit will fall another 30 percent if they fail to plant more trees.

This problem will persist unless the costs are not passed on to the customers, notes the report.

Other SourcesOther producers of orange include Mexico, Indonesia, China, Italy and Spain, all of which has yet to come into the market as a major producer. The US and Brazil continues to dominate the supply with both the countries almost contributing an equal share, totalling in at 80 percent of world production.

ConclusionThe orange juice market has an inbuilt progressive price structure, which is backed by firm fundamentals. The current high prices of orange are seen to come down later during the year only if production in Sao Paolo and Florida bounce back. Even if that happens, the long term structural problems such as strained value chain and the rising need for new trees to be planted needs to be dealt with.

See the original article >>

Industry woes could keep orange juice prices high

by Agrimoney.com

This rally in orange juice prices will be different, in not ending in a severe correction, Rabobank said, citing raised costs, and the potential for the birth of a new force in the industry.

It is "not at all certain" that orange juice futures - which in closing at 185.35 cents a pound in New York on Friday remained within 5 cents of a four-year high – will decline as supplies recover from 2010 levels, which were the lowest in a decade.

Indeed, any dip would only prove "temporary", given "structural change" in both the main producing areas, the US state of Florida, and the Brazilian state of Sao Paolo, Rabobank analyst Francois Sonneville said.

Florida's production has near-halved since 1999 thanks to the appeal of cashing in on real estate prices, while weakening margins from orange growing have dissuaded investment in groves.

The proportion of Florida orange trees aged over 14 has doubled to more than 60% so far this century, lowering production potential, and prompting Florida Department of Citrus officials to forecast a drop of a further 30% in the state's orange output could be on the cards by 2017-18.

"The average age of trees has already risen to critical levels, and without investments, we will see a severe structural decline in orange supply in the coming years, regardless of weather conditions."

'Low profitability'

Sao Paolo growers have been hurt by raised costs, swollen by hikes in Brazil's minimum wage, and the appreciating real.

In US dollar terms, Brazil's minimum wage is, at more than $300 a month, six times bigger than it was eight years ago.

The cost of the 6.8 kilogrammes of fresh oranges needed to produce 1 kilogramme of solid frozen concentrated orange juice has doubled over that period to $0.92, an increase which the industry has struggled to pass on fully to the consumer.

"For farmers, the profitability of orange production has been low and volatile, making alternatives such as such cane production or selling out to project developers more attractive," Mr Sonneville said.

'Higher for longer'

"History suggests that price will decrease once demand slows [thanks to higher prices] and orange yields recover," he said.

"However, history may now prove a poor guide."

Prices were likely to stay "higher for longer" and, could remain elevated "for the next decade".

The new Brazil?

Such an outcome could bring some solution to the supply squeeze by fostering the development of orange output in a lower-cost country, just as Brazil's industry followed on in the 1970s from Florida's, Mr Sonneville added, noting China, Indonesia Italy, Mexico and Spain, which already have notable citrus industries, as potential alternatives.

Mexico was "particularly interesting" given the that its minimum wage is lower than Brazil's and because its juice is not subject, like its Latin American rival's, to import duties to enter the huge US market.

"With sufficient investment, Mexico could develop in the way Brazil did," given that its yields, while currently less than half those in Brazil, were only some 20% adrift in the 1960s.

See the original article >>

Orange Juice

Segnale d'acquisto sull'Orange Juice 

Buy Signal on Orange Juice