We generally don’t consider the weather to impact corporate earnings or change the value of a company – other than energy companies during the winter. Cold snaps and storms can hurt the local economy that suffered the disaster, but from a macroscopic scale, they don’t seem to heavily impact day-to-day events.

Soft commodities, though, live or die based on the weather, making investing in this particular sector a rather volatile venture. Storms are always unexpected events that can decimate the global supply of certain goods. For example, a hurricane that hits Florida and causes a vast swath of destruction can severely impact global prices of orange juice.

Virtually all soft commodities, such as wheat, corn, soybeans and others, depend on a careful balance of weather conditions to produce the estimated crop yield. Even unexpectedly good weather can hurt prices, with crops yielding a greater amount and creating a supply glut.

Unlike most other asset classes, weather plays a large role in the value of soft commodities. But not all weather impacts all commodities the same way. There is a complex relationship that trickles down through the industry, so understanding how unexpected weather overseas can impact prices at home is essential for trading in this space.

Consider the drought that hit the U.S. Midwest in 2012. The event pushed up the price of corn to $8.50 per bushel as yields fell considerably in a short amount of time. Annual weather events impact natural gas prices as well. Unusually hot weather in the summer or severe winter weather can cause natural gas prices to spike quickly.

The U.S. is known as the bread basket of the world, making drought one of the biggest risks to most food commodities, such as corn, wheat and soybeans. At the same time, adverse weather in South America can impact global coffee prices while storms in Southeast Asia can influence dairy prices.

Thanks to the proliferation of commodity trading, a relatively new type of hedge is available for investors to use. Weather futures can actually be bought and traded now, but their use for speculation is unwise as the weather is understandably unpredictable. What these hedges can do, though, is mitigate risk for soft commodity-based trades so that if an unexpected weather event does occur, you won’t be caught off guard.

Keep in mind that short-term disasters can be a trading opportunity when prices diverge from their norms. These price changes can also lead to a chain effect. If drought hurts grain prices, then feed prices for livestock will become more expensive. These costs will then be passed along to the consumer in the form of increases in daily food costs and higher inflation.

Understanding weather patterns isn’t necessary to invest in soft commodities, but being aware of weather’s consequences can help you profit. Understanding the relationships between asset classes during unforeseen events can save you a lot of headaches and help you steer clear of missteps. While weather-related activity can drive commodities prices higher or lower, it’s important to remember that these are always temporary occurrences that often lead to pricing inefficiencies of which investors can take advantage.

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