Weathering market trends

In the middle of his meteorology class, Penn State student Brian Kennedy pulls out his smartphone after getting a notification from his stock-trading app. The price of soybeans is rising, so he logs onto Facebook to notify instructors that he wants to sell 10 contracts while prices are up. Returning his attention to class, he raises his hand to explain to representatives from Mars, Incorporated – who participate in weekly conference calls with the class – why he decided to sell.

This is a snapshot of what students experience in their final year of the Weather Risk Management option of Penn State’s Meteorology degree program. In the capstone course, Weather Risk and Financial Markets course (METEO 460), students take on a unique challenge designed to give a preview of how businesses today manage weather risk: They try their hand at trading futures contracts.

“This is great experience for students just before they graduate. Companies and governments routinely manage risks, and weather is one of those risks. We hope that the experience of simulating trading futures contracts will help give a taste of the real world a few months before they will be doing this type of work in their careers,” said David Titley, retired U.S. Navy rear admiral, professor of practice in Penn State's Department of Meteorology and founding director of the Center for Solutions to Weather and Climate Risk.

Buy low, sell high

At the beginning of the course, students are given a set amount of fictitious money. After being split into two groups, they are tasked with purchasing a set number of futures contracts in soybeans or natural gas, two commodities especially influenced by changing weather patterns. Students trading natural gas try to make as much profit as they can, while students trading soybeans employ a conservative approach, purchasing contracts at the right time to stay under a given budget. The students buy and sell their commodities in private Facebook groups set up for the class.

The whole idea of trading futures contracts is to predict the price of a commodity months into the future. Companies purchase contracts binding them to sell or buy a specific amount of a commodity when at the specified time — students in this capstone course simulated trading futures for May 2016 for soybean meal and June 2016 for natural gas, just after the course ends. Companies use all information at their disposal for this long-term financial forecast. For both the soybean and natural gas markets weather is often, but not always, a significant factor that modulates supply and demand.

“An extreme weather like a hurricane, flood or major tornado outbreak could disrupt a company’s global supply chain. If your supply chain is disrupted it means your product probably won’t arrive where you want it to, which affects your bottom line. But if you could anticipate the possibility of a disruption, you might be able to alter your supply chain to manage that risk. Meteorologists are really affecting that bottom line,” said Titley.

In addition to extreme weather events, other meteorological factors can cause ripples in the market. Minor droughts can affect soybean growth, for example. Demand and prices for natural gas fluctuate with the changing temperature outside as people heat homes or other buildings.

A prep course for the real world

The course takes into account material taught in prerequisite energy business and finance courses. This focus on both financial and meteorological knowledge makes the class practical, said Kennedy, a senior majoring in meteorology.

“The class is like a prep course for the real world, and it tries to marry meteorology with energy business and finance. To do well, you need to know why people buy or sell contracts in different situations. Sometimes you’re just seeing the market react to a change in stock prices. If you can figure out why it’s happening, you can use that to your advantage,” he said.

Identifying why market values change is one of the most challenging aspects of the course, but it allows students to develop and use their own reasoning. Sometimes this means using a stock-market app to track changing prices, sometimes it means reading financial blogs, sometimes it means looking at recently passed federal policies that, in a few months, could impact the market in some way.

“There are so many factors that play into futures trading, whether it’s meteorology, supply and demand, or other financial factors. It’s similar to making a weather forecast, where you have to balance aspects like cloud cover, precipitation outlooks and more,” said Kerry Mindiak, a senior majoring in meteorology.

“One of the things you learn with experience is when weather drives the market and when other economic factors are involved. This course was designed to give students some of that experience,” said Titley.

Trading like the pros

The crux of the course is the industry and alumni mentorship that occurs through weekly conference calls. Each week, representatives from Mars, Incorporated and Constellation Energy provide tips on how their experts trade futures contracts in the real world: how to complete a financial analysis, how large-scale weather patterns such as El Niño Southern Oscillation could affect commodities or how to interpret correlations between different markets. Then, after students explain their reasoning behind buying or selling, the mentors provide tips and suggestions. That industry feedback is an invaluable part of the course, said Mindiak.

“They are the experts and they’re not afraid to tell you when there may be flaws in your strategy,” she said. “The main thing has been trying to get us to open up to more than just meteorology. They’ll ask what our strategies are, and they tell us to focus on the long term and try to balance as many factors as we can.”

In addition to the semester-long trading project, the course features guest speakers discussing other aspects of weather risk management such as weather insurance, how weather affects the retail industry, how weather impacts renewable energy sources and how meteorologists make extended-range statistical forecasts.

“This course allows us to be creative,” said Mindiak. “We’re learning to apply our knowledge of weather and risk analysis and it allows us to figure out what our potential in weather risk analysis is.”

METEO 460 was designed by Paul Knight, senior lecturer emeritus in meteorology and former Pennsylvania climatologist, and Arthur Small, former associate professor of meteorology. Knight taught the course until his retirement in 2015.