Betting on the weather may not sound like a business plan, but it's what farmers, ski resorts and utilities do all the time. Now they're turning to new financial products to hedge the risk. "Every November or December we get nervous," says Eliot Peyser, CEO of Manhattan's Weatherproof Garment Co. So this year he bought $10 million of insurance to protect against a warm winter.
The insurance policy, arranged by weather-hedging specialty firm Storm Exchange of New York, is a step beyond the weather-futures contracts that have traded on the Chicago Mercantile Exchange since 1999. Those contracts track heating and cooling days, as well as snowfall, for many cities. The theory is that prices are set by a market balanced between buyers who want bad weather, like shovel manufacturers, and those who don't, like builders. The contracts have become a big business of their own: last year, $19 billion in weather contracts were traded. That's a deluge—or a windfall—depending on the hedger's perspective.