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.