Viridian Note 00395: Weather Futures Market

Key concepts:

futures markets, weather turbulence, weather-dependent industries

Attention Conservation Notice:

Concerns peculiar vagaries of contemporary capitalism; includes some mind-deadening biz-jargon.

Alas for those halcyon days when the market solutions of the "Washington Consensus" commanded some respect. Today's buffaloed WTO falls down as if pepper-gassed in the
streets. The executive briefing? "The poor die and the planet cooks."

http://www.guardian.co.uk/eu/story/0,7369,1107202,00.html

The miracle year for weather markets is 2065 AD,
the predicted year in which weather damage outpaces the planet's entire GNP. That's just a rough estimate, mind you. Could be later. Could be sooner.

http://www.eces.org/articles/000422.php

Do you suppose there is some kind of risk-hedging market solution for "megacryometeors'? No one even knows
what those darn things are.

http://www.suntimes.com/output/news/cst-nws-ice11.html

Kids! This dazzling Christmas season, test the DNA of captured dictators on your own brand-new home
electrophoresis lab!

http://www.popsci.com/popsci/bown/2003/article/0,18881,537113,00.html
http://www.guardian.co.uk/Iraq/Story/0,2763,1107868,00.html
http://www.infinitematrix.net/stories/shorts/script_doctoring_apocalypse.html

Source: Planet Ark, Reuters

http://www.planetark.com/dailynewsstory.cfm/newsid/23127/story.html

"Change in the Weather == Bet on It"
by Richard Valdmanis

USA: December 16, 2003

"NEW YORK - Buying and selling the weather may seem an even stranger way to pass the time than trading orange juice or pork bellies."

(((How exotic is this supposed to be compared to DARPA terrorism markets?)))
Link:

http://www.ccc.nps.navy.mil/rsepResources/si/sept03/terrorism.asp

"But in a year when an uncertain winter outlook threatens profits in weather-dependent industries like oil and power, a rapidly growing number of players are using weather markets to hedge their risks and anticipate Mother Nature's whims.

(((If only those were "Mother Nature's whims" instead of the whims of "industries like oil and power.")))

"Trading volumes on the Chicago Mercantile Exchange
weather futures market, the first of its kind when it came into being in 1999, have more than quadrupled since last year at roughly $1.6 billion in trades, with watchers on the sidelines coming to view the market as a
meteorological crystal ball.

((("The sky above the Chicago futures market was the color of television.")))

"'This market is an excellent way for players to hedge their weather risk, because it completely isolates the weather as a factor,' said Felix Carabello, associate director of industrial commodities and head of weather futures at the CME.

(((Yeah, but what if there's another Chicago Heat Wave and all the weather traders die?)))
Link:

http://www.press.uchicago.edu/Misc/Chicago/443213in.html

"'But the market also represents the aggregate viewpoint of all its participants and is therefore a good indicator of what people believe the weather will do,' he added.

(((What people think isn't necessarily what weather will actually do, which raises the interesting notion of a massive panic in a weather market.)))

"Weather impacts about a third of the nation's gross domestic profit, or $3 trillion of the U.S. economy, according to Rodney Weiher, chief economist for the National Oceanic and Atmospheric Administration.

(((Can anyone (besides a government economist) imagine that two thirds of the U.S. economy is immune to
weather?)))

"The weather futures market allows companies to hedge their risk by giving them a alternate source of revenue when weather hurts their core business. A heating oil supplier, for example, can bet on warm weather in New York or Boston, thus countering a loss in demand if the warmth occurs.

(((Or, just bet on crazy Greenhouse weather violence happening someplace or other, and you ought to
be able to sew up ten percent rates of return, year
after year!)))

"Energy companies often have access to in-house or private weather forecasters, and a futures market gives them incentive to act on, and thereby reveal, such information in weather futures pricing. (((It also gives energy companies incentive to lie about the havoc they themselves are wreaking on the weather and then profit by their own misbehavior. Of course, people said that about the DARPA "terrorism market," too.)))

"A market that can serve the dual function of leveling out risk and providing increased transparency into an
industry's weather expertise is a much-welcomed boon in a year that promises finicky weather patterns and
volatility.

(((Increased transparency could be nice. Viridian
principle: "Make the Invisible Visible". If, instead of poor Third Worlders dying from weather violence, rich speculators were also going broke in droves, this might compel useful action of some kind.)))

"The U.S. National Weather Service, along with several private U.S. forecasters, said this winter's weather will be particularly hard to predict due to a lack of a strong El Nino or La Nina weather driver in the Pacific.
(((Yep, it could get lively!)))

"This lack of a clear weather outlook generally makes it more difficult for energy suppliers to anticipate the nation's demand for products like heating oil, natural gas, and electricity. 'In a year like this you're bound to see interest in this market jump,' said Agbeli Ameko, managing partner for Denver-based Enercast, which provides financial information to the natural gas industry.

Link:
http://www.enercast.com/
(((Interesting site here. Too bad one has to sign up in order to use it)))

"The CME weather futures market, which logged over 18,000 contracts this year through November compared to 4,446 in the same period last year, did a good job of reflecting forecasts of abnormally warm weather in November, followed by a cold trend in December, Ameko said.

"'The market knew about the cooling trend in November well in advance of a rise in natural gas prices,' Ameko said.

(((What if the market privately learns about something really, really awful? Like, say, a sudden reversal in the Earth's magnetic field? How does one cash in on knowledge like that, eh? Really thought-provoking!)))

"While the CME would not name any of the companies that actively trade in weather futures, (((why is this a big secret?))) Carabello said they included a broad cross- section of energy companies, reinsurance companies, and even some hedge funds that see an opportunity in weather's volatility.

"'The first wave is always the pioneers,' said< Carabello. 'As people start to become more savvy about their economic relationship with the weather, they are more likely to turn that risk into weather transactions.'"