It may be impossible to control the weather, but seasonal businesses, energy companies, farmers and investors can reduce weather risk by buying and selling weather futures and options, sometimes known as weather commodities. Amusement parks might want to protect their risk of lost profit to cool or rainy days that keep attendance low. Energy companies might opt to hedge the risk that an unseasonably warm heating season slashes demand for their products. In fact, the Department of Commerce estimates that nearly one-third of the U.S. economy, or $3.5 trillion, is impacted by weather.
Commodity weather research and commodity weather analysis is the starting point for those new to these markets and is always an advisable refresher for experienced users. Business decision-makers who don't want to take on the often volatile futures and options markets by themselves or through a broker, might opt to hire a weather risk management firm specializing in this area. Some key points to consider:
1. Impact of adverse or catastrophic weather or seasonal weather swings on your business.
2. Cost of these risk management services versus potential longer-term savings.
3. Availability of risk management research and services, including weather commodity futures and options.
Action Steps
The best contacts and resources to help you get it done
Measure the impact of weather risk on your business
Many businesses of all sizes are flexible enough to withstand weather fluctuations. Some are not. A concert or event organizing firm sees its weather impact change within hours, while a wind energy firm has exposure to weather volatility over a matter of years. Measure the impact of adverse weather or seasonal weather patterns on your business before deciding if risk management research or hedging capabilities are necessary.
I recommend: MSI Guaranteed Weather has business owners in mind with its research and case studies. It includes
weather-related news.
Assess the cost of weather risk management versus long-term savings
Advisory and brokerage fees plus even moderate risk associated with all financial markets, must be considered before launching a weather risk management program.
I recommend: Guaranteed Weather's WeatherRisk
calculator and other pricing tools can help businesses crunch the numbers.
Go online for weather commodity trading and advice
Following a few direct business-to-business weather risk transactions in the energy sector in the late 1990s, weather futures trading launched on the Chicago Mercantile Exchange, or CME, in 1999. Learn more about weather volatility and ways to hedge that risk through risk management programs, including weather commodity futures and options. Tap into web based, science-heavy research on weather and weather patterns to better plan for future business decisions. Research at some of these firms also covers the supply impact from swings in weather on commodities pricing and commodities trading, from corn, soybeans and cattle to cotton and oil. Commodity weather projections are another research product that some business owners might find useful. This analysis captures historical weather patterns to predict future weather tendencies. So, how does it work? A contract's value is based a Degree Day Index, which tracks and averages temperatures in a particular area. Businesses cut their risk, th
I recommend: Learn more about
weather futures trading and weather options trading from the source, the CME. Academic firm Atmospheric and Environmental Research offers the
science research and expertise that business owners don't have the time or resources to perform for themselves. The Weather Risk Management Association is the industry's
trade group. Use this group to learn weather trading
basics, more about weather commodities and access the group's
member list.
Tips & Tactics
Helpful advice for making the most of this Guide
- Although investors and businesses use weather risk management products to reduce or enhance their profit exposure to the whims of weather, other financial risk can sometimes enter the picture unless risk management experts are consulted. Futures and options markets, in particular, can be volatile and risky for novice investors.
The official source of Market Research on Weather and Catastrophe as a Commodity is
the Market Research on Weather and Catastrophe as a Commodity page at Business.com
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