Why Speculators Like Trading Weather Markets

By Richard Weissman, DTN Institute Instructor – Derivatives, Risk Management and Technical Analysis

In a world of speculative trading, I am often asked why professionals like myself and my peers are drawn to weather markets such as grains, meats, softs and energy. There has been a recent uptick in the frequency of the questions which encouraged me to launch a new educational course on this topic.

So what is a weather event? And what constitutes a weather market and why are they so popular among speculators?

What is a weather event?

Most speculators think of weather events as cataclysmic occurrences such as major hurricanes, blizzards, tsunamis, floods and so on. In reality, weather events can also be events such as warmer than normal winters, the absence of major tropical storms, etc.  Although counterintuitive, some of the best opportunities for speculative players occur when weather-related “scares” never materialize. This is because markets tend to fall faster than they rise and because many participants typically position themselves long (buying commodities) in anticipation of a bullish weather event (e.g. supply disruption, increase in demand, etc.,).

For example, in December 2019 many participants in January 2020 CME Group Natural Gas futures had positioned themselves long in anticipation of a cold winter.  When milder temperatures unfolded throughout the northeast and midwestern United States, this quickly drove prices dramatically lower, resulting in huge profits for bearish speculators.

What is a weather market?

Although any market “could” be impacted by the weather including equities, debt securities, foreign exchange or metals (e.g. tsunamis, catastrophic hurricanes, etc.,), in general we think of “weather” markets as markets in which the assets is consistently susceptible to weather events, year in, year out.  This occurs because the commodity is grown (e.g. coffee, sugar, corn, soybeans, etc.,), is subject to the elements, like livestock or whose supply and demand are impacted by the weather like electricity, natural gas and distillates.

Why are weather markets so popular amongst speculators?

Unlike speculative tools such as high frequency algorithms where cost of entry is in the tens or hundreds of millions, access to weather services from companies DTN Weather incredibly cost-effective and highly accessible to the layman.  In addition, these markets tend to enjoy tremendous liquidity and price transparency (see my article on “Why Futures and Options are Popular“)