Hurricane season officially begins on June 1st and ends on November 30th each year. While the peak time for hurricanes hitting the United States is normally in August and September. The danger zone runs from the southern states on the east coast to the gulf coast, which stretches from Florida to Texas. The Caribbean and Mexico also find themselves in the paths of hurricanes.
As tropical storms start to develop off the coast of Africa each year and move eastward toward the U.S., commodity traders either take a cautious sigh or they begin to salivate at the potential trading opportunities that lie ahead in commodities.
Some commodity traders jump the gun much too early on hurricane trades and others are just plain gambling. I do not recommend blindly buying commodities before hurricane season in the hopes that a big category 5 will wipe out the orange crop in Florida or destroy oil platforms in the Gulf of Mexico. It is a long shot and the odds are stacked against you.
The threat of a hurricane forming in the Atlantic is sometimes enough to cause a rise in the prices of some commodities. As storms grow and get closer to the U.S., the odds increase for damage to pipelines, refineries, oil platform, crops, shipping ports and storage facilities. As probabilities for damage increase, prices usually increase proportionately.
That all sounds simple, but things can change in an instant. Sometimes hurricanes will change direction in the middle of the night or even get downgraded and the impact on commodities becomes negligible. The simple truth is that the odds are strongly stacked against any particular commodity making a sustained move higher due to a hurricane.
You need to have the right storm at the right time and it has to hit the right area…and you have to pick the right commodity…and your timing on the trade has to be right – when to get in and when to get out. I have seen traders get caught up in emotions and completely screw up the timing on trades like this. They usually buy too early or too late and no chairs are left when the music stops.
There are several commodities that should be on your radar during hurricane season:
Orange Juice: This is probably a favorite play with commodity traders during hurricane season. It seems like Florida has a big bulls-eye on it for hurricanes and most of the oranges that are used for juice are located in central to south Florida. The hurricanes of 2005 caused some serious damage to the orange crops and that is still fresh on many traders’ minds.
In order for a hurricane to cause damage to the orange crops, it will have to cross Florida in the central to southern part. Touching the coast of Florida and moving back into the ocean will not do much damage, as most of the crops are inland.
