In other words, long futures investors are willing to pay higher prices in order to hedge a disruption in their supply chain. Examples for the existence of a weather-related risk premium are the coffee risk premium in May/June (fears of cold weather that could damage the coffee crop) or natural gas in July (fears of hot weather, i.e., unusually high demand from the use of air conditioning).
Each of these short futures positions is very risky as there is no diversification in the cross section but only across time, that is, the coffee premium can be statistically reaped only at er many "Mays" and hence only makes sense in a diversified commodities program. In any case we talk about an exotic beta, as it is the compensation for passively taking on systematic risks, rather than an active strategy.
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| Weather Premium |
