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How Florida Anticipates a Hurricane: Frozen Orange Juice Futures

Florida oranges for sale in Washington in 2014.
Florida oranges for sale in Washington in 2014.
Paul J. Richards/Getty Images

How do you anticipate the risk of catastrophic hurricane damage? In jacked-up airline fares, in surge-priced taxis, in cases of bottled water selling for $42?

In Florida, at least, there’s a tried-and-true indicator of potential hurricane damage: the futures market for frozen orange juice. Futures go up when traders think the future price of orange juice will go up, and down when traders think orange juice will be more plentiful, and therefore cheaper.

If traders are worried the state’s entire orange crop is at risk of being annihilated, futures go way up. And that’s what’s happening right now. Just as Harvey’s arrival in oil-and-gas-capital Houston gave us a big spike in gasoline prices, so Irma’s arrival in Florida may juice frozen OJ prices. As the most powerful Atlantic hurricane in recorded history heads toward South Florida, the Frozen Concentrate Orange Juice futures market opened at $1.45 a pound today, up from $1.30 last week—a gain of more than 10 percent.

There’s some history behind this. In 2004, Hurricanes Charley, Frances, and Jeanne left Florida with the smallest number of viable orange trees in 18 years, sending the cost of juice concentrate skyward. In 2012, anticipation of Hurricane Isaac drove futures to a six-week high. In 2016, Hurricane Hermine sent OJ to a five-week high.

Gains driven by Irma have FCOJ at the highest point since May, when the orange industry was coming off a brutally small harvest that had doubled prices. The volume of trading is up sixfold, the Financial Times reports, in anticipation of a price spike.

Only about 20 percent of the state’s crop winds up as concentrate—in recent years, not-from-concentrate juice has gained the upper hand as it has become more popular. Still, the market remains a valuable indicator.

The Intercontinental Exchange, which offers futures trading in coffee, cocoa, sugar, cotton, and orange juice, among other things, notes that the FCOJ market is built for this type of thing:

The volatile nature of FCOJ pricing is what makes this market so vital for hedgers and so interesting for speculators. The market is prone to sharp price spikes in anticipation of weather-related disruptions in supply, including freezes and hurricanes, and to retracements of those spikes when the damage was not as bad as feared initially, or when imports of FCOJ from Brazil and other suppliers enter the U.S. market.

Like all commodity futures markets, the FCOJ serves a practical purpose for juice producers and buyers. A grower with thousands of ripe orange trees is vulnerable to a price drop, and might short a futures contract to cover her holdings. A supermarket that needs to ensure it has store-brand from-concentrate OJ is vulnerable to prices rising, and would therefore “go long,” ensuring it makes enough money to cover its purchases if prices do rise.

But it can also be an intriguing gamble for speculators who think they know more than everyone else. This is of course the plot of Trading Places, the classic ’80s Wall Street comedy starring Eddie Murphy and Dan Aykroyd:

(Here’s a detailed explanation of what’s going on there.)

How do you measure the risk of a hurricane, then? In Florida, at least, you measure it in orange juice futures.