Contracts that bet on the weather are becoming more popular.
Unlike many Midwesterners, Mike Betts loves deep snow. A Thanksgiving blizzard? Bring it on. A foot for April Fool’s Day? Perfect. His company, With a Grain of Salt, sells de-icing compounds, which means one of Betts’s worst nightmares isn’t too much snow but too little. So last year he paid $65,000 for contracts on the Chicago Mercantile Exchange that would have paid him $260,000 if Detroit’s airport (a proxy for the region) received no snow in December.
The airport got 9.3 inches that month, and Betts lost his gamble, but the snowfall gave him enough wingtip-destroying salt sales to offset the trade. This year he plans to buy contracts that stretch through the entire winter. “I go home with less risk and guaranteed profitability in the event of light snowfall,” Betts says.
Weather traders hope more businesses follow in Betts’s footprints. They see big profits in selling weather contracts to customers beyond their traditional market—energy industry buyers looking to offset the risk that a warm winter or cool summer might hurt gas or electricity sales. “If you are in a business where your revenue is determined by snowfall, then by not hedging you are actually gambling,” says Jeff Hodgson, president of Chicago Weather Brokerage, who helped Betts complete his trade.
The Weather Risk Management Assn. says this year’s record snowfall, flooding, heat, and drought prove the importance of weather contracts. The industry group of 46 companies points to a June study by the National Center for Atmospheric Research (NCAR) that says abnormal weather can subtract roughly $240 billion from the economy in any given year.
“Weather risk is truly a risk that permeates our society,” says Bill Windle, the group’s president and managing director of RenRe Energy Advisors, a top seller of weather hedges. “I am betting my kids’ college education” on the business.