OJ Futures: Ahead Of Looming Hurricane

Orange Juice futures will be the market to watch next week as speculation is growing that Tropical Storm Isaac will strengthen into a hurricane and hit the prime citrus-rich growing area on the south coast of Florida.

Although hurricane season officially began on May 31, there has been no major threat to the major orange juice growing regions until now. The heat dome that covered most of the United States during June and July, causing a severe drought in corn and soybean growing areas, may have prevented a major hurricane from forming. But now that conditions have changed, the door may be opened for further tropical storms until the season ends on November 1. The current path of the storm suggests that the country’s top citrus growing region may be hit as early as Monday.

Sluggish Market Fundamentals
Although traders expect prices to remain elevated unless the storm misses the Florida coast, the market isn’t projected to hold on to any weather-related gains over the long run as market fundamentals remain sluggish because of weak global demand and an abundance of supply.

The surge in September Orange Juice futures compared to the November contract suggests that current supply is the market’s most immediate concern. Traders should note that this is a highly speculative move and a direct hit from the hurricane may already be priced into the market. If there is further upside action, then the weekly charts indicate that the rally may stop at or inside major 50 to 61.8 retracement zones.

Technical analysis of the Nearby September Orange Juice futures contract shows that the weekly main trend turned up when the market crossed the July 10 top at 131.55. This move confirmed the double-bottom formed between 100.00 and 105.15. Renewed speculative buying the week-ending August 31 should drive the market into the retracement zone bounded by 151.40 and 163.50. A rally into this area is the minimum expected move.

The weekly November Orange Juice futures contract is trying to confirm the double-bottom forming between 102.30 and 103.50. The confirmation and change in trend will take place when the swing top at 128.40 is violated.

Upside Objective
Based on the shorter-term range of 175.50 to 102.30, the first upside objective is the retracement zone at 138.90 to 147.55. The main range is 197.45 to 102.30. This range creates a potential target zone at 149.90 to 161.10. The key area to watch is the resistance cluster at 147.55 to 149.90. A test of this area could prove to be an excellent spot to short the market if the storm doesn’t produce as much damage as speculated .

OJ Differs From Corn, Soybean Supply
For those who think this weather market is capable of producing gains like this summer’s drought rally, think again. The supply situation for corn and soybeans was completely different going into the growing season. There was virtually no room for error. The orange juice supply situation shows an ample amount of product available so any damage is likely to produce a short-lived rally.

Historically, frost has done more damage to the citrus crop than hurricanes. The rally in the September contract reflects short-covering and hedging by orange juice producers and processors who need to take protection against a possible crop loss. The height of the rally will be determined by how much damage is sustained versus what is freely available in storage.