Orange Juice and Weather

Motivation(s)

There are a lot of commodities on the market, but each of them have their own complicated interaction with asset prices. If one understands that relationship, then profitability comes easily.

Proposed Solution(s)

The author assert that frozen concentrated orange juice is a relative good candidate for a study of interaction between prices and a truly exogenous determinant of value, the weather. Production is concentrated around Orlando, so the relevant weather is easy to measure. It seems unlikely to be sensitive to nonweather influences on supply and demand since national income and tastes probably do not fluctuate enough to explain a significant part of the daily OJ juice movement. Short-term variations in supply induced by planting decisions must be quite low because growing oranges is on the order of five to fifteen years.

Evaluation(s)

The author examined FCOJ contracts on NYCE between 1975 and 1981 due to the limited weather data. The distant contracts with little open interest were discarded, and nearest-maturity contract had to be discarded due to its high volume which increased price volatility.

Organizing the data according to season identified winter to have more variability due to possible freezing. The author identified January as responsible for the larger winter mean OJ, and Monday’s variability may be due to the limit rules of the Citrus Associates of the NYCE.

Since dropping below freezing will damage the orange trees, the author modeled the morning and evening temperatures as unweighted and weighted regressions. The results demonstrated explantory powers, but not statistically significant. Other factors such as foreign news and rainfall had even less statistical significance. Regressing over firms that utilized orange juice (e.g. soft drinks) revealed supply shocks affected a small part of OJ price movements.

Future Direction(s)

• Use NLP to determine how much of a paper’s claims is based on statistical significance.

• Use NLP to determine if a methodology is sound.

Question(s)

• Why the emphasis on statistical significance?

Analysis

This paper came to the wrong conclusion due to its emphasis on statistical significance instead of focusing on economical significance. It is surprising that the author simply assumed foreign trading and crop failures will not impact the asset prices. Reading this paper after the paper that analyzed the FCOJ market more thoroughly provided insights into what a misleading paper would look like. Despite the flawed evaluation due to imprecise methodology, the paper did reasonably point out why FCOJ is a good market to analyze.

References

Rol84

Richard Roll. Orange juice and weather. The American Economic Review, 74(5):861–880, 1984.