Hello friends.
Orange Juice seems to defy gravity itself. It has pushed up wildly over the past 3 years, nearly reaching a new all-time high. This has created the greatest opportunity to short orange juice since 2016. Let us explain the different elements of our idea.
Point 1 - Orange juice has reached a key resistance when measured against money supply inflation
Because of innovation, the price of commodities will almost always fall over a long time period when measured against inflation. Orange juice has made no exception to this global rule, having fallen by 85% from 1970 to the present date. That is a yearly return of -1.6%, which should also represent our "innovation factor". In other words, we get 1.6% better at making orange juice every single year.
But now it has made a retracement to the normal downtrend, which provides an opportunity for us to short. Here is something to chew on: Despite innovation inevitably increasing in the years between 2004 and 2022, the price of orange juice has risen so much that it currently goes all the way back to the same levels as the lows 18 years ago in 2004. The price rarely retraces this deeply, and whenever it has retraced in this way the price has always made a substantial decline in the following years. To use our innovation factor for this, we could say that we are likely about 1.6 times 18 = 28.8% better at making orange juice, and yet orange juice is trading at the same price. This obviously won't last forever. We should expect a new all-time low in adjusted orange juice prices within a few years if trends continue.
Point 2 - Orange Juice deficit is very minimal
Yes, we are currently running an orange juice deficit -- but it's a negligible one, and the high price will definitely rectify it in the future. The USDA estimate is that we will have roughly 3% more orange juice consumption than orange juice production for 2022. This only speaks to a short-term lack of orange juice capacity, and the long-term will not look this way. Think about this. Orange prices only rose from $0.79/kilo to $0.93/kilo over the span of 2022 (+17.7%). Yet orange juice futures rose from 140 to 210 over that time period (+50%!!). This massive difference in the price movements is important because it means that orange juice producers are raking in much bigger profits at these prices and are going to expand their production capacity in order to cash in. This expansion of production capacity will mean we see more orange juice supply coming online going into 2023 and beyond.
Point 3 - Price-sensitive consumers will not buy at high levels
The average orange juice consumer is relatively price-sensitive, especially during a recession. They may view orange juice as a good breakfast option at a low price, but they will no longer be as willing to purchase orange juice at a high price. What is stopping them from swapping out orange juice for milk, assuming they like milk just as much and milk is also cheaper? Why not swap it out for another kind of juice that hasn't seen this kind of parabolic rise, for that matter? Orange juice consumers are not like gasoline consumers, who MUST have gasoline in order to get to work. Orange juice is an unnecessary luxury. Unnecessary luxuries are the first thing that consumers cut back on when they are laid off from their jobs, and layoffs are expected to increase going into 2023 as the economy worsens. This will weaken the demand for orange juice.
If we chart the price of milk futures against the price of orange juice futures, we can indeed see that milk is starting to become cheaper and more attractive. In a more practical sense, Walmarts near me are charging ~2.5 cents per fluid ounce of milk versus 7 cents per fluid ounce of orange juice (prices will vary based on the product, but I am looking at more of a median of all the prices).
Final thoughts
Orange juice is too expensive. Consumers are going to drink less. Producers are going to make more. Prices are going to fall. Markets are going to heal. They always do.
Orange Juice seems to defy gravity itself. It has pushed up wildly over the past 3 years, nearly reaching a new all-time high. This has created the greatest opportunity to short orange juice since 2016. Let us explain the different elements of our idea.
Point 1 - Orange juice has reached a key resistance when measured against money supply inflation
Because of innovation, the price of commodities will almost always fall over a long time period when measured against inflation. Orange juice has made no exception to this global rule, having fallen by 85% from 1970 to the present date. That is a yearly return of -1.6%, which should also represent our "innovation factor". In other words, we get 1.6% better at making orange juice every single year.
But now it has made a retracement to the normal downtrend, which provides an opportunity for us to short. Here is something to chew on: Despite innovation inevitably increasing in the years between 2004 and 2022, the price of orange juice has risen so much that it currently goes all the way back to the same levels as the lows 18 years ago in 2004. The price rarely retraces this deeply, and whenever it has retraced in this way the price has always made a substantial decline in the following years. To use our innovation factor for this, we could say that we are likely about 1.6 times 18 = 28.8% better at making orange juice, and yet orange juice is trading at the same price. This obviously won't last forever. We should expect a new all-time low in adjusted orange juice prices within a few years if trends continue.
Point 2 - Orange Juice deficit is very minimal
Yes, we are currently running an orange juice deficit -- but it's a negligible one, and the high price will definitely rectify it in the future. The USDA estimate is that we will have roughly 3% more orange juice consumption than orange juice production for 2022. This only speaks to a short-term lack of orange juice capacity, and the long-term will not look this way. Think about this. Orange prices only rose from $0.79/kilo to $0.93/kilo over the span of 2022 (+17.7%). Yet orange juice futures rose from 140 to 210 over that time period (+50%!!). This massive difference in the price movements is important because it means that orange juice producers are raking in much bigger profits at these prices and are going to expand their production capacity in order to cash in. This expansion of production capacity will mean we see more orange juice supply coming online going into 2023 and beyond.
Point 3 - Price-sensitive consumers will not buy at high levels
The average orange juice consumer is relatively price-sensitive, especially during a recession. They may view orange juice as a good breakfast option at a low price, but they will no longer be as willing to purchase orange juice at a high price. What is stopping them from swapping out orange juice for milk, assuming they like milk just as much and milk is also cheaper? Why not swap it out for another kind of juice that hasn't seen this kind of parabolic rise, for that matter? Orange juice consumers are not like gasoline consumers, who MUST have gasoline in order to get to work. Orange juice is an unnecessary luxury. Unnecessary luxuries are the first thing that consumers cut back on when they are laid off from their jobs, and layoffs are expected to increase going into 2023 as the economy worsens. This will weaken the demand for orange juice.
If we chart the price of milk futures against the price of orange juice futures, we can indeed see that milk is starting to become cheaper and more attractive. In a more practical sense, Walmarts near me are charging ~2.5 cents per fluid ounce of milk versus 7 cents per fluid ounce of orange juice (prices will vary based on the product, but I am looking at more of a median of all the prices).
Final thoughts
Orange juice is too expensive. Consumers are going to drink less. Producers are going to make more. Prices are going to fall. Markets are going to heal. They always do.