Bad Weather a Boon for Private Forecasters
With commodity markets across the globe in the thrall of extreme weather, private-sector meteorologists are increasingly providing custom-tailored weather intelligence to the financial world. This time of year their services are in high demand.
“It grows quiet down here from 11 to 12 and it’s because they’re waiting for the midday weather update, waiting for the next piece of information,” said Matt Pierce, analyst for GrainAnalyst.com who has been on the trading floor at the Chicago Board of Trade for more than 10 years.
While government forecasters provide broad public advisories, traders, hedge funds and corporations are employing their own staff meteorologists or relying on the 300 U.S. commercial weather vendors for forecasts targeting specific locations and industries.
“We let our customers know so they can hedge their risks long in advance, before many in the market are even aware a weather-related event is on the horizon,” said Matt Rogers, a long-range forecaster at Commodity Weather Group LLC.
Airlines need to know where the winds might carry a cloud of volcanic ash and construction firms want to avoid pouring concrete when it could be weakened by rain. Utilities rely on bespoke forecasts to predict the load on the electric grid at any given moment.
“Those are easily million-dollar decisions,” said Peter Neilley, vice president of global forecasting services for The Weather Channel Companies.
Business is booming for those able to transform millions of bits of data — ranging from the strength and path of a hurricane to hourly temperature readings — into simple, understandable trading points.
While one-third of the nation’s 9,400 meteorologists work for the federal government, the private sector is driving growth. The U.S. Bureau of Labor Statistics projects employment in this specialty rising by 15 percent to 10,800 by 2018, with virtually all the increase coming privately.
Companies find that money spent to hire a meteorologist or contract a specialized forecasting firm can pay off many times over in targeting markets or avoiding peril, Keith Seitter, American Meteorological Society executive director, said.
He cites the now-legendary example of the train wreck that didn’t happen when a monster tornado leveled Greensburg, Kansas, in May 2007 and killed 11 people.
Forecasters from the private firm WeatherData, which is part of AccuWeather, alerted their client, Union Pacific, that a tornado was about to hit as two of its trains approached the town on separate tracks from opposite sides. Dispatchers were able to halt them two miles apart and the tornado passed between without damaging either.
“It certainly would have not only wrecked the train but potentially would have caused more loss of life,” Seitter said.
Such specific warnings have become possible only in the last decade or two as technological advances have steadily improved the accuracy of weather forecasting.
Modern radar can show how fast a storm is moving. Increasingly powerful computers and computer models allow forecasters to quickly receive and analyze vast amounts of data that pours in from geostationary and polar-orbiting satellites, ground monitoring stations, planes and ships and sea buoys.
Most commercial meteorologists use data from the National Oceanic and Atmospheric Administration and the computer models developed by U.S., European and Canadian government forecasters as a foundation for their work, then build on it to develop proprietary models and algorithms for client-specific products. Choosing which model to rely on is still the forecaster’s job.
“There’s never a perfect computer model forecast,” said Sharan Majumder, assistant professor at the University of Miami’s Rosenstiel School of Marine and Atmospheric Science.
“The human is still a very central player in the forecasting process.”
Forecasters say they’ve improved by “a day a decade” — today’s five-day forecast is as accurate as the four-day forecast issued 10 years ago and the three-day forecast issued 20 years ago.
“Twenty years ago you couldn’t get a really good three- or four-day forecast and now you can,” Seitter said.
At the National Hurricane Center in 2000, forecasters predicted within an average of 150 miles where a storm would be two days later. By 2010, they narrowed that to 100 miles at the two-day mark, the crucial period when evacuation decisions are made.
Shrinking that “cone of uncertainty” has enormous impact. Emergency managers peg the cost of hurricane evacuations at $1 million per mile of coastline.
For the offshore oil platforms spread across the Gulf of Mexico, an extra 50 miles can make the difference between a precautionary evacuation and a multi-year salvage operation. That, in turn, can move oil prices by dollars a barrel as traders factor in more or less available crude.
Researchers at the National Center for Atmospheric Research in Boulder, Colorado, tried to calculate just how much the weather affects the U.S. economy by comparing 70 years of temperature and precipitation records against 24 years worth of economic output data.
They concluded in a study published in May that U.S. economic output varies by up to $485 billion a year of 2008 GDP, or about 3.4 percent, because of weather extremes. That is enough to turn rebound into recession.
“Even if it’s only a couple percent, we’re still talking hundreds of billions of dollars of impact on the United States economy,” said Jeff Lazo, one of the study’s authors. Much of the risk can be mitigated by weather awareness, he said.
Advances in forecasting have given rapid rise to a market for weather derivatives, contracts in which one side pays the other if the weather is warmer, cooler, wetter, windier or snowier than expected.
Utilities and agriculture companies use them as a hedge against losses that fall short of those covered by catastrophe insurance. The market for those derivatives is barely 15 years old and grew by 20 percent last year, to $11.8 billion, according to the Weather Risk Management Association.
(Additional reporting by K.T. Arasu and Samuel Nelson in Chicago and David Sheppard and Jeanine Prezioso in New York) (Editing by Pascal Fletcher and Philip Barbara)