Could you auto-hedge your weather risk with sufficient real-time data?

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Earlier today I was reading a press release from Planalytics which discusses a deal they’ve struck to provide weather data services to a large ice cream manufacturer, Dreyer’s Grand Ice Cream, Inc. Planalytics will be providing Dreyer’s with access to data through their Weather Driven Demand (WDD) indices. Dreyer’s will be able to identify where demand for their products will be higher or lower due to weather conditions, Planalytics translate the raw data into meaningful business intelligence as part of their Planalytics’ Consumer InsightsSM service.

That’s great, and businesses which have any impact on demand (or supply) of their products due to fluctuating weather conditions should all be using weather data to help them plan and address these impacts more effectively and thus smooth their cash flow. However, this lead me to think that this could be taken a step further.

If a model of your products demand versus the weather conditions over time was created, could that be linked to an electronic weather hedging system which could automatically buy/sell the correct financial protection (derivatives/futures/insurance) to help you smooth earnings even more? The accuracy of forecasting could obviously leave you open to loss as well as gain on such a system but over time it seems likely that it could prove effective. I’m interested to hear your opinions on such an idea, do you think it could be made to work? With the high availability of quality weather data and forecasts and the increasing sophistication of both the technology required and the financial products used surely it is likely we will see such a trading system in the future.

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