Take a punt on the weather with grains and orange juice

THE summer months might be a quiet time for most traders, but not all. For those who make their money watching the prices of assets such as wheat, corn and orange juice, this is when the market is at its peak. In many cases, the outlook for the harvest is becoming clearer, and industry analysts and growers are starting to publish their predictions for the season&rsquo;s harvests.<br /><br />Of course, even at this point it is impossible to predict the crop yields. They are still heavily dependent on the sunshine and rainfall that we will see over the next month or two, which can severely disrupt these crops&rsquo; growing cycles and create a shortage or a glut in the market. In other words, there&rsquo;s still some uncertainty left, meaning that this is just the time for contracts for difference (CFDs) traders to take a view on how the prices will move.<br /><br />The usual way that you would trade on these commodities is by trading on the futures contracts. CFDs on orange juice, wheat and corn futures are available through most of the major providers, although due to their volatility, limited-risk account holders may not be eligible to trade them. London and US wheat CFD contracts are available, while corn and orange juice CFDs are based on underlying US contracts. The spreads are relatively tight &ndash; for example two basis points for US wheat futures and 0.5 for orange juice with GFT.<br /><br />So what is the outlook? Both wheat and corn have been hovering around their lows and recent data revisions have been extremely bearish for both commodities, highlighting ample supplies, say analysts at Barclays Capital. And the US Department for Agriculture&rsquo;s (USDA) re-survey of corn acreage only made a modest cut to acreage while increasing US yields to 159.5 bushels/acre from 153.4 in July, increasing 2009/10 US production by 11.9m tonnes to 324.1m tonnes and global production 6.5m tonnes higher to 796.3m.<br /><br />The report did not bode well for the wheat market, either. While production was scaled back in both Argentina and Canada, this was more than offset by higher projected output from China, the US, the EU and India, taking global production 2.8m tonnes higher to 645.2m.<br /><br />However, because both of these commodities are trading at low prices &ndash; wheat is close to the 20-year average price in terms of constant 2009 dollars &ndash; they could be predicted to go higher if the market decides they are over-sold, especially if adverse weather threatens harvests.<br /><br />Another widely-traded agricultural future is orange juice, largely because oranges are so versatile and demand is so massive. In contrast to wheat and corn, this market has seen sharp price gains over the past fortnight and futures prices hit their highest levels for a year on Wednesday. Concerns about Florida&rsquo;s disease-hit citrus crop and signs that juice demand is improving pushed orange juice futures 45 per cent higher in six weeks.<br /><br />Florida&rsquo;s citrus industry is the world&rsquo;s second largest, behind Brazil&rsquo;s Sao Paulo state, and analysts had been predicting that Florida&rsquo;s crop would drop in the 2009-10 season, which starts in October, to 150m-155m boxes. The widely anticipated forecast from Citrus Consulting International&rsquo;s Elizabeth Steger showed Florida growers would produce 154m boxes of oranges. But leading trading house Louis Dreyfus, one of the world&rsquo;s three largest processors of orange juice, forecast 141m boxes of oranges in 2009-10, which could drive orange juice futures prices higher.<br /><br />With hurricane season fast approaching in early September (see box), there is risk that this forecast of 141m could be more accurate and will boost futures prices further &ndash; prices are still well below the record high of $2.095 per pound set in March 2007 after hurricane damage reduced production.<br /><br />That said, orange juice futures might be worth a short in the near-term as the overbought market starts to retrace its overly fast gains, which would normally take a good part of the summer to develop.<br /><br />This is the right time to be trading on agricultural futures. But remember that it is risky. As anybody who has ever sat in a tent in a rainstorm knows, the weather can play havoc with the best-laid plans.<br />