Weather Risk Managementfor AgricultureMichigan State University.ppt

Weather Risk Management for AgricultureMichigan State UniversityMarch 22, 2002 Weather is a Business Risk Recent Weather Related News Items: …”Bullish hopes that a recent bout of hot and dry weather would hurt the quality of the 2001 crops were thrown aside following reports of a rainy, cool weekend in key corn and wheat growing regions…..” WSJ, May 22, 2001 …”Hot, dry weather in August damaged the nations corn crop, dropping the estimated harvest to the lowest in four years….” St. Louis Dispatch, September 15, 2001 “Weather Problems Result in Bad Year for Michigan Wine Grape Growers”….”even before the growing season began, more than half of the buds of damage-prone wine grape varieties were killed by harsh winter temperatures in December…..” Knight Ridder, October 20, 2001 Weather is a Business Risk That Can be Covered The market for weather risk management products was established in late 1997 to help energy companies hedge volumetric risk and smooth revenue streams. It is quickly migrating to new industries as participants become familiar with the applications and benefits of these products. Volume of transactions since market inception is roughly $10 billion. Weather risk management tools are used by companies for protection against “adverse” weather conditions. Companies no longer have to bet on “good” weather. Weather Risk Management Products Weather risk management products are structured as customized financial instruments that allow companies to hedge weather-related revenue or margin exposure. Protection generally for a season (winter/summer) or multiple seasons. Protection is typically based on an average weather index during a season or on a specific weather event occurring during the season. Protection is typically capped to reduce cost. Protection can be tailored for a specific location or can be based on a basket of multiple locations. Protection may be imbedded or combined with other risk management tools or into physical commodity