Friday, January 30, 2015

"10 Things Weather Forecasters Won’t Tell You"


That's the title of an interesting article at MarketWatch.  I had no idea that weather was such big business (the weather forecasting 'market' was worth $6 billion in 2014, according to the article).  Here's just one of the ten points they discuss.

7. “The financial markets keep us on our toes.”

One way companies protect against unexpected weather is to buy weather futures — essentially financial contracts that pay off in the case of adverse weather like hurricanes or extreme temperatures. These contracts seem to be having a surprising side effect: They are making weather measurements more accurate.

The Chicago Mercantile Exchange, on which many such contracts trade, says they’re used as a hedging mechanism by companies like ski resorts, electric utilities, snow removal firms, and others that depend on certain weather conditions to profit. A company might enter into a contract with a financial institution. One bets that the temperature will be on average over 65 degrees in a certain location next month, while the other bets that it will be less than 65 degrees on average. The difference between the benchmark and reality (based on NWS measurements) determines who gets a payout at the end of the month.

And exchange-traded weather contracts are just one portion of a large base of weather futures, much of which takes place over the counter, says Brown, of Swiss Re.

Amiyatosh Purnanandam, associate professor of finance at the University of Michigan, and doctoral student Daniel Weagley did research on the weather contracts and the accuracy of the NWS’s measurements. Readings from NWS stations in the field can sometimes be off initially, as a result of calibration, maintenance issues, or external interference (the agency later issues corrected temps). But the researchers found that, after a weather futures contract was introduced in a specific city, those errors fell by about 10%.

The National Weather Service doesn’t often make mistakes in its measurements, but the added scrutiny of the financial markets puts pressure on the meteorologists to make measurements more accurate, Purnanandam says. It’s an example of how financial markets can influence behavior.

But while the market may have been one factor in improving weather data accuracy, the weather service says it’s always working to improve.

There are nine more points at the link.  Interesting reading, particularly if you only watch the weather forecast for your own area and don't think about how it can impact commerce and industry.

Peter

3 comments:

Sam Hall said...

Electric utilities watch the temperature very closely because it determines how many generators that they have to have turning.

Old NFO said...

Based on 'my' experience with weatherguessers, I'd tend to bet against them... sigh

Graybeard said...

I'm not in the least surprised if people essentially betting real money work hard to improve their forecasts and results.

The power of the market, in a way.