FINANCIAL MARKETS : Freezing Weather Takes Chill Off Commodity Markets
Florida orange growers and northern heating oil users may curse the cold, but the weather has been a blessing to commodity speculators who have profited from skyrocketing futures prices of the two products.
Speculative trader George Booth estimates his customers will make $700,000 to $1 million off the Florida freeze.
The Norwood Hyacinth Fund, a public futures fund managed by Dunn Capital Management Inc. in Stuart, Fla., tallied profits of $383,000 in the heating oil futures market from Nov. 22 through Wednesday, according to Jay Klopfenstein of Norwood Securities, the fund’s sponsor.
Commodity speculators don’t deny the public perception that they make money from things that cause other people misery. But they defend their gains as the hard-won rewards of their extremely risky business.
And their business was doing poorly this year until the record-breaking cold spell hit this month.
Mort Baratz, editor of Managed Accounts Report, monitors 169 public futures funds and 129 private investor pools that provide opportunities for investors to speculate in commodity and financial futures markets.
“I can tell you that the great majority of them have had a very difficult year through the end of November,” he said Thursday.
“Suddenly along comes a cold wave with a substantial effect on heating oil and orange juice,” Baratz said in a telephone interview from his office in Columbia, Md. “Now I’m confident that many of those I follow will recoup some if not all the losses they sustained in the first 11 months.”
There are two kinds of traders in the futures markets: speculators and hedgers.
Hedgers are producers or users of commodities who buy and sell in the futures markets as insurance against price swings in the cash markets. For example, when a freeze hits, an orange grower can sell futures contracts at high prices. When prices inevitably fall, the hedger can buy them back at the lower price and use the profit from that transaction to offset his cash loss from freeze damage.
Speculators are not involved in industries that produce or use the commodity. They buy and sell in the futures markets on the hope of profiting from price changes.
The recent rallies in orange juice and heating oil have been spectacular. The price of heating oil for delivery in January soared 74% from Nov. 22 through Wednesday, when the contract settled at 99.71 cents a gallon on the New York Mercantile Exchange. The contract fell 3.31 cents on Thursday.
During the same period, frozen concentrated orange juice for January delivery surged 23% to $1.5015 a pound on the New York Cotton Exchange, with most of those gains made in the past two weeks.
Booth, of Palo Alto, calls himself one of the country’s biggest orange juice speculators. His company, George Booth & Associates Inc., manages about $32 million invested by 15 individual customers and 10 funds spread among 22 futures markets.
Booth said those who depict orange juice speculators as vultures circling the devastated groves of Florida orange growers don’t understand the realities of frozen oranges or the futures market.
He said freezing an orange reduces its juice content but doesn’t destroy it, so orange growers haven’t been entirely wiped out.
And many growers are as savvy as speculators at using the futures market, which is essentially a vehicle for transferring risk to those willing to accept it.
A Dec. 22 report from the Cotton Exchange showed hedgers outnumbering speculators in the orange juice market, about 12,500 to 10,200.
HEATING OIL PRICES
Per gallon for the near-month contract for heating oil on the New York Mercantile Exchange; a contract is 42,000 gallons
Amounts in cents:Nov.15: 57.13
Dec.28: 96.40
ORANGE JUICE PRICES
January orange juice contract price per pound from Nov.15 1989, through Dec.27, 1989.
Amounts in cents
Nov.15: 122.80
Dec.27: 150.15
Source: New York Cotton Exchange
