Red Sky at night, sailor’s delight. Red sky in the morning, sailor take warning. Clear moon, frost soon. Ever hear these sayings? The National Oceanic and Atmospheric Administration (NOAA) does research so that it is not necessary for market participants to rely on proverbs such as these to get a sense of the outlook for environmental conditions.
Using state-of-the-art technology NOAA, through its various organizations, distributes accurate daily weather forecasts, severe storm warnings and climate monitoring with a presence in every state. The agency uses instruments including satellites, doppler radar, land-based sensors and buoys in the ocean to monitor and track weather and climate information.
NOAA traces its roots back to 1807 when President Thomas Jefferson signed a law authorizing the formation of a survey of the U.S. coast. This makes it one of the oldest agencies in the federal government. NOAA as it exists today was formed in 1970. The organizations that comprise NOAA include the National Environmental Satellite, Data, and Information Service; the National Marine Fisheries Service; the National Ocean Service; the National Weather Service; the Office of Oceanic and Atmospheric Research; and the Office of Program Planning and Integration.
NOAA provides daily weather forecasts for the entire United States and its territories. It also partners with the U.S. Department of Agriculture to provide weekly agricultural weather reports. Most weather reports you see on television or online are derived from models that use data from NOAA satellites and other land and ocean-based instruments, and its National Weather Service provides information on soil moisture.
The agency also maintains a relationship with CME Group as a means to better understanding how the financial space uses NOAA’s weather and climate information and inform exchange representatives about its ongoing efforts to better serve the unique information needs of the markets.
“All Weather-Sensitive Industries”
In 2008, Ray Ban retired from his position as executive vice president of programming and meteorology at The Weather Channel, where he worked for almost 27 years. He is still engaged with The Weather Channel as a consultant to support their partnerships within the weather and climate enterprise which include NOAA, NASA, the Department of Defense and other federal agencies involved in weather and climate analysis and prediction. Ban says the entire weather and climate enterprise depends significantly on the data and other products that NOAA provides.
“All weather-sensitive industries like agriculture and energy rely on complete and accurate weather prediction,” Ban says.
He adds that his first professional use of NOAA data and information was in 1973 when he was an operational weather forecaster for AccuWeather, Inc. “I continued using NOAA content extensively during my career at The Weather Channel,” he says.
Commodity market participants follow NOAA’s information releases to get a sense of outlooks for crops. NOAA information also impacts the supply and demand of energy. Individuals involved in the weather derivatives market also keep an eye on NOAA data.
Dog days and degree days
Weather derivatives had their start in July 1996 when Aquilla Energy structured a dual-commodity hedge for Consolidated Edison. Today, a broad range of weather derivative products are available including options, futures, forwards and swaps. Most are traded over-the-counter.
In 1999, CME Group introduced exchange-traded weather futures and options on futures. These contracts trade in an electronic auction-like environment and enable entities to protect themselves against losses caused by unexpected shifts in weather conditions.
The main users of weather derivatives are energy companies as demand for their products can vary drastically due to extreme weather conditions. The agricultural industry is the second main user of such instruments.
Unlike other derivative products, the underlying assets – including rain, frost and wind – have no direct value with respect to the price of the contract.
NOAA’s data shows average global temperatures for March 2012, which were the coolest for March since 1999
“As the country that experiences more severe weather than any other nation on Earth, America’s success depends on our ability to understand and predict the future and make informed decisions in response to anticipated challenges and opportunities,” says Under Secretary of Commerce for Oceans and Atmosphere and NOAA Administrator Jane Lubchenco. “NOAA’s timely and trusted weather and climate information helps businesses, governments and communities maximize opportunities and minimize risks in a changing environment – safeguarding lives, property and economic investments.”
One way NOAA does this is through their weekly U.S. Drought Monitor, which provides a broad-scale look at drought conditions across the country. The service features an interactive drought forecasting tool that allows farmers, energy suppliers and other market participants to make informed business decisions about current and future drought levels.
Mike Myers is a vice president of operations for Delta Western, Inc., a company that transports and distributes fuel products in coastal communities throughout Alaska via barges and trucks. Because Delta Western’s operations can be significantly impacted by severe weather conditions, the company relies on many of the products from NOAA/NWS from analysis, forecast models, ice coverage, and real time storm tracking in order to plan routes and make preparations for severe weather conditions.
“Having access to images, buoy and station reports, graphic models, and good analysis allows us to plan, prepare, and prevent potential damages or injuries from significant weather events,” says Myers.
According to Myers, Delta Western has been monitoring the data through broadcast radio, websites and automatic satellite broadcast since the early 2000s. He contends that without the data supplied by NOAA, the business would have to rely on ship to ship reports and local area forecasts to operate.
“An old timer like me has seen an incredible improvement in the accuracy of forecasting, especially in the last few years,” Myers adds. “It would be hard to quantify, but I am sure that countless lives have been spared because of the preparedness allowed by the many NOAA products.”