It’s an indisputable fact that the weather can affect the economy of a country, or an entire region, for good or bad. But, the economy cannot affect day-to-day weather. So, which is more important? Do we think about the economy every day of our lives, like we do the weather?
I’d venture to say that we don’t, unless the economy happens to be the personal economy of money in your wallet, or when a financial crisis hits.
In my mind, short-term weather is a vital cog in the economic merry-go-round, and long-term climate is arguably becoming even more manifest. On the other hand, it’s also safe to say that capitalism per se has, to one degree or another, fostered man-made climate change, and right now capitalism is in a mad scramble to undo some of the damage … for a price, of course.
Climate and the economy
Let’s go back to basics. It’s not by accident that over the past 400 years or so, when economic prowess actually began to mean something, the majority of the world’s economic powerhouses resided in areas where the climate was neither too hot, too cold, too wet or too dry – or, at least, not any of those for too long. Indeed, the fiscal porridge was (or still is) just about right for many of the world’s leading economies.
Of course, there are countries, such as the US and China, that straddle several climate zones, which do include hostile weather such as hurricanes, typhoons, tornadoes, bone-chilling cold, mountainous snow and unbearably hot and humid conditions. However, that hostility rarely persists year-round, and there are other parts of those vast countries that enjoy hospitable climates that allow industry and business to more easily flourish. Moreover, countries that boast a number of climatic zones actually benefit from a consequent diversity of products and services.
Of course, countries can also raise their economic status simply by what comes out of the ground, namely oil and precious minerals took no further for examples of that than the likes of Saudi Arabia and other Middle Eastern states. Climate is certainly not on their side, but they’re fortunate in other ways.
Other countries are not so lucky in terms of what comes out of the ground or descend from the heavens. For them, economic survival is the watchword. Across Africa, Asia, Central America and elsewhere, inhospitable, unproductive or unpredictable climates, often coupled with short-term weather horrors and mismanagement and/or corruption, help produce economic basket cases.
The bottom line here is that the majority of successful economies tend to have ‘helpful’ climates, and much of the rest is down to natural resources, politics, good or bad management and natural disasters other than those related to climate and weather.
The impacts of pure weather
When it comes to the pure weather (as opposed to broader climatic) influences on the economy, we’re talking relatively short-lived affairs. These range from a few hours, in the event of major storms, to somewhat longer periods when extremes of weather make the normal passage of life virtually impossible.
If the measure of a strengthening or weakening economy lies in the rise and fall of the gross domestic product (GDP), then weather events such as protracted hard winters, severe droughts, flooding or major storm damage can have a materially negative effect. There will be weather winners and weather losers at such times, and one has to watch for politicians and business leaders using the weather as a convenient excuse for poor performance.
Nevertheless, as a rule of thumb, if the weather is severe enough, GDP for the impacted quarter is likely to slip below the projected trend line. (Note that roughly 70% of GDP is driven by consumers, and even in the best of times the buying public can be as fickle as the weather.)
How financial markets embrace the weather’s impacts
So, if we’re agreed that weather can be a major player in economic wellbeing, how do the financial markets embrace such impacts? Well, in my spare time (of which I tend to have very little) I have been known to dabble in weather-related markets, and clients engage BWS for focused advisories. My experience has been that, as with sections of the retail industry, the financial trading world reacts more than it anticipates. Upon the announcement of quarterly results by a company that has been weather-impacted, for better or worse, its stock price may move wildly, although it had been stable or heading upward.
That begs the question, what precisely are analysts and traders looking at – or, more likely, not looking at – to have not advantageously positioned themselves ahead of the earnings announcement?
For example, a very mild winter will never play well for a company that sells cold weather-related goods or services. Similarly, a wet, cool summer rarely bodes well for a company whose wares leverage hot and sunny weather.
Once one is aware of the prime weather players, the next step is to assess whether the weather of the recent past has been more of a friend than an enemy for the companies in question. Everything else considered (and I’ll delve into the ‘everything else’ bit in a moment), to be informed is to be empowered.
And then there are the weather-related commodities: things like oils, natural gas and many agricultural crops. Starting with the latter, we all know how weather- dependent the likes of corn, coffee, soya beans, oranges, cocoa, sugar and cotton are. It doesn’t take an agronomist to look at the mechanics of these cash crops, and then map the current weather – or better still, forecast the weather that’s coming – and how one will impact the other. That is, in fact, the stock in trade of a slew of commodity-associated weather-forecast organizations.
Fear of (or hope for) of a certain type of weather will drive prices up or down, sometimes to a greater degree than the actual weather event itself. The fear factor can move futures markets massively, in a very short time span. For example, orange juice futures tend to rise when forecasters predict a meaningful frost across Florida’s citrus-growing regions. The same could be said about predicting prolonged wet weather and its effect on US soya bean or cotton crops. In Brazil and central Africa, weather forecasting plays a similarly significant role in price fluctuations in coffee or cocoa futures.
But is not just a matter of Mother Nature
Having said all that, I really wish it was that easy. If it was, we’d all be multi-millionaires pretty damn quickly … but of course it was never going to be that simple. I’ll explain why by recounting a true-life horror story.
Many moons ago, a BWS colleague and I thought we had found an easy path to instant wealth and glory, as one will do. The thinking was simple: it involved anticipating a spike in US heating oil demand due to the onset of freezing winter weather in those heavily-populated northeastern states. We would then buy the commodity on a spread-betting platform, before everybody else discovered the emerging treasure chest.
It’s fair to say that there was no problem anticipating the frigid plunge when it showed itself on our modelling. And so, happy as two little lambs, on we jumped, convinced that we were ten steps ahead of the crowd.
At the time, this particular spread-betting company had pretty large spreads (the gap between buy and sell positions), and one had to have fairly deep pockets to be able to engage even at the lowest levels, which is definitely where we were. We made our move and waited for the world to catch up and start the big buy. It didn’t take that long for a reaction to unfold, but it wasn’t what we were expecting.
On day two, the heating oil price began to fall. By day three it wasn’t just falling, it was sinking. How could this be? After all, winter was about to bite a few million bottoms very hard. Well, heating oil is very much linked to crude oil, and when crude moves, the tendency is that most other traded oils follow likewise. The problem for us was that non-weather fundamentals were at work.
Somewhere, someone (we later found out it was OPEC) was moving the goal posts, and sadly for us in the wrong direction! We clung on for another week, hoping and praying that the bloody meddling OPEC would have a change of mind, and all would come good as the snows lay thick in New York and Boston. Alas, they never did.
Between us, we lost the equivalent cost of a small new car. The mad, sad and naïve traders had certainly bit off more than they could chew!
However, within all of that, there was one mighty important lesson – one that rings true to this day. Yes, weather impacts and climate changes can and do move the financial Earth, but there are many forces beyond Mother Nature’s influence that can dictate the market’s ebbs and flows. Geopolitical shifts, economic factors, the moods and whims of market-controlling algorithms and even a single Tweet or indeed a devastating virus can scuttle the best-laid plans.
Financial trading is not only about playing the short-term blips and slips, because the majority of traders look long term. And so, monthly and seasonal weather outputs are seriously important. A seasonal peak or trough in a certain commodity or stock for weather-related reasons will not stay at the same level if pure weather is the driver, simply because the weather flows up and down. It does so as much, if not more, than those wavy financial graphs that nearly always lead back to square one, eventually.
Looking even further ahead, and with climate change increasingly becoming a major market-impacting factor, it may pay for you to take a good look at new or relatively new companies that are integral to offsetting climate change in one way or another. I don’t know how these mostly US companies are going to perform in the years to come, but Beyond Meat (a producer of plant-based meat substitutes) and Generac Inc (a backup-power generation supplier for when the lights really go out), are two that fit the bill. There are of course many others out there to tickle your fancy.
There are no panaceas here either, but after the final chapter you may want to refer back to this one.
Finally, before executing any weather-related trade, it pays to aggregate as much relevant information as possible.
Utilize the skills and expertise of a financial advisor and a savvy meteorologist, if necessary, to help ensure that you’re on a firm footing.
It bears repeating that nothing is guaranteed; nothing can be. But trading, like sports betting, is all about edges and being one step ahead of the crowd – not necessarily ten!
ABOUT THE AUTHOR
Jim N R Dale is the founder and consultant meteorologist at the British Weather Services – the UK’s leading independent weather operate. Jim is British and resides in the UK.
LinkedIn: Click here
LEARN MORE ABOUT WEATHER OR NOT
The impact of the weather is often taken for granted and sometimes completely ignored. Weather in all forms is a maker and breaker of both business and personal fortunes, especially when it reaches extremes. The weather we experience crucially dictates almost every aspect of our lives. It directs what we do and when we do it, from what we eat and drink, to the clothes we wear, and it even governs our health and behaviour.
In this entertaining and informative book, global expert meteorologist and weather authority, Jim N R Dale, shares his experiences and advises how you and your business could truly become weather savvy. Weather impact is an all-consuming phenomenon, and, with the rise of climate change, there is no better time to tune into one of the most important aspects of our lives. Certainly, a book for a rainy day!
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