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Can You Get Rich Betting on the Weather?

Did you know that you can invest in the weather? Yes, that’s right. The weather. You can take a financial gamble that the temperature in Sacramento will be one degree warmer than average, or even bet that it will be five degrees cooler.

Too dull for your portfolio?

How about putting some money down on the amount of snowfall next winter in Boston? Or frost in Amsterdam? Or hurricanes in the Gulf of Mexico?

Each of these investments can be made in an investment product category called weather futures. Traded through the Chicago Mercantile Exchange, these weather contracts provide investors a highly risky and speculative chance to control – financially at least – that most uncontrollable matriarch, Mother Nature.

Not quite sure how on Earth this could possibly work? Don’t worry, you’re not alone. Let’s start at the beginning.

How Futures Work: A Case Study Using Captain Crunch

At their heart, weather futures trade just like commodity futures. Commodity futures are the backbone of economic trading system surrounding goods like oil and lumber and pork bellies.

So how does a basic futures contract work? Well, let’s say that you are Captain Horatio Magellan Crunch, retired naval hero and maker of a popular eponymous breakfast cereal. To make your delicious crunchy nuggets, you need about 100 tons of corn per month. Let’s say that you’re worried about the increasing use of corn-based Ethanol in large commercial vehicles driving up the cost of corn and subsequently cutting into your profits. Buying a futures contract lets you lay claim to some of next season’s corn now while prices are still relatively low.

A futures contract is, at its simplest, a financial tool that allows you to do the equivalent of licking the last piece of pizza so that the other kids can’t have it. It’s a way for consumers to claim dibs on goods before they’re ready to use them. By putting a little extra money down now, you can lock in a date and a price for the goods you want, and hedge against the risk of the price going up in the future.

So, let’s say you, the Captain, want to lay claim to about 1,200 tons of corn for next year’s production. You would buy a futures contract promising to pay a specified price per ton for delivery on a specific date. For example, the contract might state that you will pay $100 per ton for 1,200 tons on Jan 1 of 2010. Your up-front cost for the contract is $3 per ton, or $3,600, not a deposit on the future purchase mind you, but the cost you pay to lock in the future price today. You’re willing to pay a little extra ($103 total per ton rather than the going rate of $100) because you’re worried about the price of corn going up.

If corn goes up to $200 per ton by January, you’re thrilled because you’ve got the right to buy it at only $100. You’ve saved yourself almost $100 per ton. But if it goes down, you’ve wound up costing yourself more than if you had done nothing at all. You’ll sell the contract at an almost total loss and be out most of the $3600.

The same financial principles are at stake when your old college roommate options his blockbuster screenplay to Paramount. Because getting a film from page to screen is such a long and iffy process, and because most films that get pitched never wind up being made, studios and producers prefer to option a screenplay rather than buy it outright, reserving the right to buy the script when the picture actually gets greenlighted. An option contract of this type might simply state that Paramount reserves the right to buy your buddy’s script anytime within the next year for $1 million dollars.

For this option, they’re willing to pay your old roommate $5,000. Paramount is not promising to buy the script, they’re just keeping the scavengers from Miramax from buying it up during the next year while they try to firm up Mandy Moore for the leading role.

If a year goes buy, and Paramount decides that they’re not going to make the picture, your friend can go shop his script to the other studios. Some scripts are optioned ten times before the film actually gets made.

From Ancient Babylon to Ralph Bellamy: The History of Futures Trading

Archeological evidence points to some type of futures contracts being in use as long ago as 6000 B.C. in China. Other evidence shows rudimentary clay tablets in Babylon with carvings of sheep and grains on them, suggesting a basic type of promissory note obligating delivery of market produce to the bearer of the tablet.

The first standardized and documented use of these contracts goes back to 17th century Japan, where those who had stores of rice in their warehouses would sell receipts against the rice to raise cash. These “rice tickets” came to be used as an informal currency, changing hands dozens of times before the rice was actually claimed.

Throughout the 17th and 18th centuries, commodity exchanges popped up wherever trade and transportation were an issue: London, Amsterdam, Paris, and New York – with the granddaddy of them all, the Chicago Board of Trade, opening in 1848. It was there, nestled in the city that Carl Sandburg labeled the “hog butcher of the world,” that simple agricultural markets would go from the hands of farmers and merchants into the pockets of hedge fund managers and high-risk traders, and eventually into the plot of the movie Trading Places.

In the 1983 buddy movie, Eddie Murphy and Dan Akroyd use a dummied-up crop report to get the Duke brothers (exquisitely played by Ralph Bellamy and Don Ameche) to run up the price for frozen concentrated orange juice (FCOJ) futures. The Duke brothers wind up going broke on the gamble and Murphy and Akroyd make enough from the scheme to buy their own island.

Weather Investing: Money Between the Raindrops

These days, you can buy and sell contracts for wheat, milk, cattle, soybeans, pork bellies, lumber, and a dozen more subgroups of commodities. You can also trade futures on financial indexes like the Dow Jones Industrial Average, foreign currencies, and of course, weather events.

Simple temperature contracts cover temperature changes in 25 cities in the U.S. and Canada, and another dozen or so in Europe, Asia, and Australia. There are also contracts that cover frost, snow, rain, and hurricanes.

For the basic temperature contracts, a trader can pay a premium to another trader, the seller, for an option that lets him wager on future temperatures. If the temperature hits a specified level, the buyer collects an agreed-upon amount from the seller. If it doesn't, the seller keeps the premium and the contract expires. The whole thing is based on units called “degree days.” Temperatures are calculated daily from a baseline of 65 degrees Fahrenheit (18 degrees Celsius.) Each degree below 65 counts as one "heating degree day," the designation originally developed for utilities to calculate demand. A temperature of 50 degrees, for instance, counts as 15 HDDs. In summer, cooling degree days are calculated from the same 65-degree baseline.

You might ask what possible real-world application these contracts might have other than pure speculation. It turns out that in the right hands, these contracts can be quite useful. For example, in the United Kingdom, utility companies estimate that a one-degree temperature change causes a 5% swing in natural gas demand. If you’re a utility or a natural gas consumer of great quantity, you might want to purchase a hedge against the possibility of the run-up on the price of gas. Or, if you’re a huge consumer of oil refined in the Gulf of Mexico, then you’d be pretty interested in buying hurricane futures since large storms typically bring chaos to oil prices.

Also, if you own a ski resort or a golf course, the weather can make or break your business. An ordinary insurance company won’t sell you a policy based on rainfall, but you might be able to make some money on a rainfall investment to offset the loss you take when a downpour comes along and washes out the 15th fairway.

The Enron Corp. is responsible for selling the first weather derivative 10 years ago, agreeing to pay a utility $10,000 for each wintertime degree that was below normal. After a lull following Enron’s historic flameout, the weather trading market has taken off. Trading in weather contracts jumped 100-fold from 2003-2007, according to the Chicago Mercantile Exchange. This was due, in no small part, to hedge funds.

Some estimates put hedge fund speculation at over 50% of the $19 billion weather futures market. That means that instead of the farmers, oil rig operators, baseball stadium owners and other parties that have a direct relationship between their business and the weather, the majority of weather trading is done by speculators. This trend has been seen in almost every commodity market. Whether oil spikes or corn speculation, investors are taking over markets that were once the bailiwick of farmers and rural bankers. Or at least they were.

With the current economic downturn, futures trading volume was down 46% in 2008, with weather contracts down 54% as a group. With difficult times ahead, and the distinct possibility that exotic derivative products are partly to blame, many traders have gone back to basics.

And it’s no wonder. A recent study at Penn State pitted two distinct groups against each other in a weather trading simulation to see which would be more successful. According to the study’s press release, “the results so far show the market to be far more profitable for traders who are studying meteorology than those who are studying business.”

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10 Memorable Neil deGrasse Tyson Quotes
Michael Campanella/Getty Images
Michael Campanella/Getty Images

Neil deGrasse Tyson is America's preeminent badass astrophysicist. He's a passionate advocate for science, NASA, and education. He's also well-known for a little incident involving Pluto. And the man holds nearly 20 honorary doctorates (in addition to his real one). In honor of his 59th birthday, here are 10 of our favorite Neil deGrasse Tyson quotes.

1. ON SCIENCE

"The good thing about science is that it's true whether or not you believe in it."
—From Real Time with Bill Maher.

2. ON NASA FUNDING

"As a fraction of your tax dollar today, what is the total cost of all spaceborne telescopes, planetary probes, the rovers on Mars, the International Space Station, the space shuttle, telescopes yet to orbit, and missions yet to fly?' Answer: one-half of one percent of each tax dollar. Half a penny. I’d prefer it were more: perhaps two cents on the dollar. Even during the storied Apollo era, peak NASA spending amounted to little more than four cents on the tax dollar." 
—From Space Chronicles

3. ON GOD AND HURRICANES

"Once upon a time, people identified the god Neptune as the source of storms at sea. Today we call these storms hurricanes ... The only people who still call hurricanes acts of God are the people who write insurance forms."
—From Death by Black Hole

4. ON THE BENEFITS OF TECHNOLOGY INVENTED FOR USE IN SPACE

"Countless women are alive today because of ideas stimulated by a design flaw in the Hubble Space Telescope." (Editor's note: technology used to repair the Hubble Space Telescope's optical problems led to improved technology for breast cancer detection.)
—From Space Chronicles

5. ON THE DEMOTION OF PLUTO FROM PLANET STATUS 


PBS

"I knew Pluto was popular among elementary schoolkids, but I had no idea they would mobilize into a 'Save Pluto' campaign. I now have a drawer full of hate letters from hundreds of elementary schoolchildren (with supportive cover letters from their science teachers) pleading with me to reverse my stance on Pluto. The file includes a photograph of the entire third grade of a school posing on their front steps and holding up a banner proclaiming, 'Dr. Tyson—Pluto is a Planet!'"
—From The Sky Is Not the Limit

6. ON JAMES CAMERON'S TITANIC

"In [Titanic], the stars above the ship bear no correspondence to any constellations in a real sky. Worse yet, while the heroine bobs ... we are treated to her view of this Hollywood sky—one where the stars on the right half of the scene trace the mirror image of the stars in the left half. How lazy can you get?"
—From Death by Black Hole

7. ON DEATH BY ASTEROID

"On Friday the 13th, April 2029, an asteroid large enough to fill the Rose Bowl as though it were an egg cup will fly so close to Earth that it will dip below the altitude of our communication satellites. We did not name this asteroid Bambi. Instead, we named it Apophis, after the Egyptian god of darkness and death."
—From Space Chronicles

8. ON THE MOTIVATIONS BEHIND AMERICA'S MOONSHOT

"[L]et us not fool ourselves into thinking we went to the Moon because we are pioneers, or discoverers, or adventurers. We went to the Moon because it was the militaristically expedient thing to do."
—From The Sky Is Not the Limit

9. ON INTELLIGENT LIFE (OR THE LACK THEREOF)

Perhaps we've never been visited by aliens because they have looked upon Earth and decided there's no sign of intelligent life.
Read more at: https://www.brainyquote.com/quotes/quotes/n/neildegras615117.html
Perhaps we've never been visited by aliens because they have looked upon Earth and decided there's no sign of intelligent life.
Read more at: https://www.brainyquote.com/quotes/quotes/n/neildegras615117.html

"Perhaps we've never been visited by aliens because they have looked upon Earth and decided there's no sign of intelligent life."

10. PRACTICAL ADVICE IN THE EVENT OF ALIEN CONTACT 

A still from Steven Spielberg's E.T. the Extra-Terrestrial
Universal Studios

"[I]f an alien lands on your front lawn and extends an appendage as a gesture of greeting, before you get friendly, toss it an eightball. If the appendage explodes, then the alien was probably made of antimatter. If not, then you can proceed to take it to your leader."
—From Death by Black Hole

How Apple's '1984' Super Bowl Ad Was Almost Canceled

More than 30 years ago, Apple defined the Super Bowl commercial as a cultural phenomenon. Prior to Super Bowl XVIII, nobody watched the game "just for the commercials"—but one epic TV spot, directed by sci-fi legend Ridley Scott, changed all that. Read on for the inside story of the commercial that rocked the world of advertising, even though Apple's Board of Directors didn't want to run it at all.

THE AD

If you haven't seen it, here's a fuzzy YouTube version:

"WHY 1984 WON'T BE LIKE 1984"

The tagline "Why 1984 Won't Be Like '1984'" references George Orwell's 1949 novel 1984, which envisioned a dystopian future, controlled by a televised "Big Brother." The tagline was written by Brent Thomas and Steve Hayden of the ad firm Chiat\Day in 1982, and the pair tried to sell it to various companies (including Apple, for the Apple II computer) but were turned down repeatedly. When Steve Jobs heard the pitch in 1983, he was sold—he saw the Macintosh as a "revolutionary" product, and wanted advertising to match. Jobs saw IBM as Big Brother, and wanted to position Apple as the world's last chance to escape IBM's domination of the personal computer industry. The Mac was scheduled to launch in late January of 1984, a week after the Super Bowl. IBM already held the nickname "Big Blue," so the parallels, at least to Jobs, were too delicious to miss.

Thomas and Hayden wrote up the story of the ad: we see a world of mind-controlled, shuffling men all in gray, staring at a video screen showing the face of Big Brother droning on about "information purification directives." A lone woman clad in vibrant red shorts and a white tank-top (bearing a Mac logo) runs from riot police, dashing up an aisle towards Big Brother. Just before being snatched by the police, she flings a sledgehammer at Big Brother's screen, smashing him just after he intones "We shall prevail!" Big Brother's destruction frees the minds of the throng, who quite literally see the light, flooding their faces now that the screen is gone. A mere eight seconds before the one-minute ad concludes, a narrator briefly mentions the word "Macintosh," in a restatement of that original tagline: "On January 24th, Apple Computer will introduce Macintosh. And you'll see why 1984 won't be like '1984.'" An Apple logo is shown, and then we're out—back to the game.

In 1983, in a presentation about the Mac, Jobs introduced the ad to a cheering audience of Apple employees:

"... It is now 1984. It appears IBM wants it all. Apple is perceived to be the only hope to offer IBM a run for its money. Dealers, initially welcoming IBM with open arms, now fear an IBM-dominated and -controlled future. They are increasingly turning back to Apple as the only force that can ensure their future freedom. IBM wants it all and is aiming its guns on its last obstacle to industry control: Apple. Will Big Blue dominate the entire computer industry? The entire information age? Was George Orwell right about 1984?"

After seeing the ad for the first time, the Apple audience totally freaked out (jump to about the 5-minute mark to witness the riotous cheering).

SKINHEADS, A DISCUS THROWER, AND A SCI-FI DIRECTOR

Chiat\Day hired Ridley Scott, whose 1982 sci-fi film Blade Runner had the dystopian tone they were looking for (and Alien wasn't so bad either). Scott filmed the ad in London, using actual skinheads playing the mute bald men—they were paid $125 a day to sit and stare at Big Brother; those who still had hair were paid to shave their heads for the shoot. Anya Major, a discus thrower and actress, was cast as the woman with the sledgehammer largely because she was actually capable of wielding the thing.

Mac programmer Andy Hertzfeld wrote an Apple II program "to flash impressive looking numbers and graphs on [Big Brother's] screen," but it's unclear whether his program was used for the final film. The ad cost a shocking $900,000 to film, plus Apple booked two premium slots during the Super Bowl to air it—carrying an airtime cost of more than $1 million.

WHAT EXECUTIVES AT APPLE THOUGHT

Although Jobs and his marketing team (plus the assembled throng at his 1983 internal presentation) loved the ad, Apple's Board of Directors hated it. After seeing the ad for the first time, board member Mike Markkula suggested that Chiat\Day be fired, and the remainder of the board were similarly unimpressed. Then-CEO John Sculley recalled the reaction after the ad was screened for the group: "The others just looked at each other, dazed expressions on their faces ... Most of them felt it was the worst commercial they had ever seen. Not a single outside board member liked it." Sculley instructed Chiat\Day to sell off the Super Bowl airtime they had purchased, but Chiat\Day principal Jay Chiat quietly resisted. Chiat had purchased two slots—a 60-second slot in the third quarter to show the full ad, plus a 30-second slot later on to repeat an edited-down version. Chiat sold only the 30-second slot and claimed it was too late to sell the longer one. By disobeying his client's instructions, Chiat cemented Apple's place in advertising history.

When Apple co-founder Steve Wozniak heard that the ad was in trouble, he offered to pony up half the airtime costs himself, saying, "I asked how much it was going to cost, and [Steve Jobs] told me $800,000. I said, 'Well, I'll pay half of it if you will.' I figured it was a problem with the company justifying the expenditure. I thought an ad that was so great a piece of science fiction should have its chance to be seen."

But Woz didn't have to shell out the money; the executive team finally decided to run a 100-day advertising extravaganza for the Mac's launch, starting with the Super Bowl ad—after all, they had already paid to shoot it and were stuck with the airtime.

1984 - Big Brother

WHAT EVERYBODY ELSE THOUGHT

When the ad aired, controversy erupted—viewers either loved or hated the ad, and it spurred a wave of media coverage that involved news shows replaying the ad as part of covering it, leading to estimates of an additional $5 million in "free" airtime for the ad. All three national networks, plus countless local markets, ran news stories about the ad. "1984" become a cultural event, and served as a blueprint for future Apple product launches. The marketing logic was brilliantly simple: create an ad campaign that sparked controversy (for example, by insinuating that IBM was like Big Brother), and the media will cover your launch for free, amplifying the message.

The full ad famously ran once during the Super Bowl XVIII (on January 22, 1984), but it also ran the month prior—on December 31, 1983, TV station operator Tom Frank ran the ad on KMVT at the last possible time slot before midnight, in order to qualify for 1983's advertising awards.* (Any awards the ad won would mean more media coverage.) Apple paid to screen the ad in movie theaters before movie trailers, further heightening anticipation for the Mac launch. In addition to all that, the 30-second version was aired across the country after its debut on the Super Bowl.

Chiat\Day adman Steve Hayden recalled: "We ran a 30- second version of '1984' in the top 10 U.S. markets, plus, in an admittedly childish move, in an 11th market—Boca Raton, Florida, headquarters for IBM's PC division." Mac team member Andy Hertzfeld ended his remembrance of the ad by saying:

"A week after the Macintosh launch, Apple held its January board meeting. The Macintosh executive staff was invited to attend, not knowing what to expect. When the Mac people entered the room, everyone on the board rose and gave them a standing ovation, acknowledging that they were wrong about the commercial and congratulating the team for pulling off a fantastic launch.

Chiat\Day wanted the commercial to qualify for upcoming advertising awards, so they ran it once at 1 AM at a small television station in Twin Falls, Idaho, KMVT, on December 15, 1983 [incorrect; see below for an update on this -ed]. And sure enough it won just about every possible award, including best commercial of the decade. Twenty years later it's considered one of the most memorable television commercials ever made."

THE AWFUL 1985 FOLLOW-UP

A year later, Apple again employed Chiat\Day to make a blockbuster ad for their Macintosh Office product line, which was basically a file server, networking gear, and a laser printer. Directed by Ridley Scott's brother Tony, the new ad was called "Lemmings," and featured blindfolded businesspeople whistling an out-of-tune version of Snow White's "Heigh-Ho" as they followed each other off a cliff (referencing the myth of lemming suicide).

Jobs and Sculley didn't like the ad, but Chiat\Day convinced them to run it, pointing out that the board hadn't liked the last ad either. But unlike the rousing, empowering message of the "1984" ad, "Lemmings" directly insulted business customers who had already bought IBM computers. It was also weirdly boring—when it was aired at the Super Bowl (with Jobs and Sculley in attendance), nobody really reacted. The ad was a flop, and Apple even proposed running a printed apology in The Wall Street Journal. Jay Chiat shot back, saying that if Apple apologized, Chiat would buy an ad on the next page, apologizing for the apology. It was a mess:

20-YEAR ANNIVERSARY

In 2004, the ad was updated for the launch of the iPod. The only change was that the woman with the hammer was now listening to an iPod, which remained clipped to her belt as she ran. You can watch that version too:

FURTHER READING

Chiat\Day adman Lee Clow gave an interview about the ad, covering some of this material.

Check out Mac team member Andy Hertzfeld's excellent first-person account of the ad. A similar account (but with more from Jobs's point of view) can found in the Steve Jobs biography, and an even more in-depth account is in The Mac Bathroom Reader. The Mac Bathroom Reader is out of print; you can read an excerpt online, including QuickTime movies of the two versions of the ad, plus a behind-the-scenes video. Finally, you might enjoy this 2004 USA Today article about the ad, pointing out that ads for other computers (including Atari, Radio Shack, and IBM's new PCjr) also ran during that Super Bowl.

* = A Note on the Airing in 1983

Update: Thanks to Tom Frank for writing in to correct my earlier mis-statement about the first air date of this commercial. As you can see in his comment below, Hertzfeld's comments above (and the dates cited in other accounts I've seen) are incorrect. Stay tuned for an upcoming interview with Frank, in which we discuss what it was like running both "1984" and "Lemmings" before they were on the Super Bowl!

Update 2: You can read the story behind this post in Chris's book The Blogger Abides.

This post originally appeared in 2012.

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