Weather is big business, not only for insurers that provide protection from the aftermath of a storm, but also for services that can forecast or offer protection against unforeseen occurrences. On July 6, General Electric's (NYSE:GE) subsidiary, NBC, agreed to pay an estimated $3.5 billion to buy the Weather Channel, which also includes Accurate weather predictions have value not only for planning weddings and picnics, but also for investors and the business world. Let's take a look at how weather forecasts impact business activity.

Weather Forecasting Service Provider
Weather Trends International was recently profiled on the ABC network for the weather forecasting services it provides to well-known clients, including retailer Wal-Mart (NYSE:WMT), clothing manufacturer VF Corp. (NYSE:VFC) and the investment banking firm Citigroup (NYSE:C). Weather intelligence allows companies to time marketing events and product offerings, and to better estimate future orders based on variations in temperature, rainfall and other factors. For this service, the companies pay an undisclosed fee. The return on investment has turned Weather Trends' users into loyal clients. Individuals can also use Weather Trends' free service to forecast weather conditions one year ahead for events such as weddings or vacations.

Banking on the Weather
Weather derivatives are another reason why predicting the weather has become a business activity. These financial instruments work like an insurance policy against poor market conditions. For example, suppose that a gas utility company pays a premium to a weather derivatives broker like TFS Energy LLC to protect itself from financial losses due to an unusually warm winter. If the weather proves to be warmer than a predetermined benchmark, the utility receives a payment based on the value of the contract purchased. If the weather turns out to be normal, the derivatives broker keeps the premium. In this case, the utility company protects itself by ensuring a certain level of income over the winter - if it's warm, the income will come from the derivative, if it's cold, it will come from customers. (To learn more, read Introduction To Weather Derivatives.)

The $32 billion weather derivatives market is driven by banks, utilities and hedge funds. In June, the Weather Risk Management Association out of Washington,D.C., reported a growing use of weather derivatives from India, Latin America and Southeast Asia. The World Bank is also proposing to use weather derivatives to reduce the threat of drought in developing countries. If a tragic event occurred, the World Banks client country would receive a payout from the bank. The Chicago Mercantile Exchange (Nasdaq:CME) is home to the majority of the weather derivatives traded. Banks with weather trading operations include Merrill Lynch (NYSE:MER) and Credit Suisse Group (NYSE:CS).

Farmer's Almanac
A favorite read among commodities traders who want to get a leg up on future weather conditions is the Farmer's Almanac. Weather forecasts for the year are critical to farmers, and futures traders and investors who are eager to determine how an unusually wet or dry season will affect crop prices may look for answers here.

Predicting the weather is not an exact science; in fact, none of the forecasting services mentioned predicted the recent flooding in the Midwestern U.S., but business interest in the weather should continue to grow. Even without the 100% guarantee weather forecasting service buyers would prefer, it appears that walking into a dark room with a flashlight is better than walking in blindfolded.

Related Articles
  1. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  2. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  3. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  4. Investing

    Oil: Why Not to Put Faith in Forecasts

    West Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Economics

    Is the U.S. Economy Ready for Liftoff?

    The Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
  7. Professionals

    How Brokers are Candy-Coating Alternatives

    Alternatives have become a sexy choice for many advisors. But they also come with additional risks that are not always clearly spelled out to clients.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Investing

    What is Carried Interest?

    Carried interest is the percentage of a private equity or a hedge fund’s profits that its general partners receive as compensation.
  1. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!