Weather and Agricultural Data

Weather moves markets. A colder than expected winter lifts natural gas prices; a hot, dry July can send corn soaring; a hurricane can shut refineries and offshore platforms. Commodity traders study weather forecasts, historical climate patterns and crop data as closely as equity analysts study earnings. Weather data is one of the oldest forms of alternative data, and its sophistication has grown with better forecast models and satellite observations.

Markets most sensitive to weather#

Degree days#

Energy traders measure temperature driven demand with degree days:

heating degree days (HDD) = max(0, 65°F - average daily temperature)
cooling degree days (CDD) = max(0, average daily temperature - 65°F)

Forecast models#

Energy markets often move when new model runs come out, especially if the forecast for the next two weeks changes significantly.

Climate patterns#

• El Niño and La Niña: shifts in Pacific Ocean temperatures that affect weather worldwide. La Niña has often been associated with dry conditions in Argentina and the southern US; El Niño with drier conditions in parts of Asia and Australia.
• Polar vortex events: sudden cold outbreaks that can spike gas and power prices, as in February 2021, when Texas faced extreme cold and power prices in ERCOT hit the $9,000 per megawatt hour cap.

Agricultural data#

Trading considerations#

1. Trade the change in forecasts, not the weather itself; markets price forecasts quickly.
2. Know the calendar: weather matters most at critical crop stages and peak demand seasons. See Seasonality in Commodities.
3. Expect volatility around model runs and USDA reports.
4. Use ensembles to judge uncertainty.
5. Manage risk: weather markets can gap on forecast shifts.

Frequently asked questions#

How does weather affect commodity prices?#

Temperature affects energy demand, rain and heat affect crop yields, and storms can disrupt production, all of which change supply and demand.

What are heating degree days?#

A measure of how much colder a day's average temperature is than 65°F, used to estimate heating demand for natural gas and power.

Which weather models do traders use?#

Mainly the US GFS and the European ECMWF models, along with ensemble forecasts and seasonal outlooks.

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