CHL To Get Rich Off Of Global Warming
Today's blog report comes to you from the Chicago Mercantile Exchange, where the CHL has just placed a large fraction of its corporate assets into global warming futures. And who says there is no money on a dead planet??

CHICAGO — When the owners of a chain of London wine bars realized that business was better on warm days, they found an investment that would pay off when the temperature dropped. Corney & Barrow Wine Bars protected itself by turning to an emerging corner of the investment world: weather derivatives.

In July, the Chicago Mercantile Exchange (the Merc) added the Japanese cities of Tokyo and Osaka to a list of 20 cities — 15 in the United States and five in Europe — where customers could invest in the weather.

Since the late 1990s, energy producers and insurance companies are among those who have invested in the weather to protect themselves from losses because there was not enough, or too much, sunshine. In Corney & Barrow's case, "they budget for a certain number of days where it's really, really nice out," said Martin Malinow, executive vice president of Bermuda-based XL Weather & Energy, which helps businesses manage their risk of losing money because it's colder or warmer than expected. "If they don't get those days — a shortfall of drinking days — then they're certainly going to see less business."

The wine bar "bought ... protection from bad days," Malinow said. The investment contracts structured for Corney & Barrow paid the company when the number of warm days fell below predetermined levels.

Weather derivatives were first embraced by energy companies in the mid-1990s, but some investors predicted the market would falter when giants like Enron left a few years later. But it hung on and began to grow. "As traders begin to better understand opportunities — trading weather against other commodities, such as gas or heating oil — it creates even more opportunities," said Felix Carabello, a Merc associate director who oversees the exchange's trading in weather futures and options. "It really challenges the whole paradigm of what is a tradable commodity."

Although not tangible like soybeans, corn or cattle, or as popular as interest rates, trading the weather is not much different from buying future contracts on any of those products. All that's necessary is to have someone willing to take the other side of the transaction. In weather derivatives, that side is normally taken by banks, hedge funds and reinsurers.

"If a natural-gas utility has a warm winter, they won't sell as much natural gas," said Holden Burrow, director of the natural resource group at Aon Risk Services, part of Chicago-based Aon. "If the weather is 95 percent of the normal 10-year average, they're going to be susceptible to a hiccup in their earnings." Utilities can reduce the impact of that hiccup with weather derivatives that will pay if there are too many warm days.

Energy producers and utilities remain the prime customers for such investments, but other industries have found a use for them, said Bill Windle, senior vice president at reinsurer Swiss Re. "Look at amusement parks," he said. "Gate receipts have a high correlation with the number of rainy and cool days. Rain has an impact on construction. So does heat, when the temperature can limit productivity."

In addition to the Merc, there is an over-the-counter market for weather derivatives, where investments can be made on other natural phenomena, such as rainfall. But because such deals are between two parties, it's difficult for both sides of the transaction to be sure they got the best deal possible.

Weather futures and options have something else in common with other products traded at the Merc and other exchanges. Despite the best predictions available, forces are at work that can move the market in unexpected ways, the Merc's Carabello said. "Interest rates have Alan Greenspan," he said. "We have Mother Nature."
- nostradamusfunkadelic, 2:26 PM | |