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Managing Weather Risk in Uncertain Times

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Slides from a presentation I gave in Chicago at the CME Commodity Price Risk Conference hosted at DePaul University on February 4, 2009.

Slides from a presentation I gave in Chicago at the CME Commodity Price Risk Conference hosted at DePaul University on February 4, 2009.

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Transcript

  • 1. Commodity
Risk
Management
Conference

 Managing
Weather
Risk
in
Uncertain
Times
 Paul
E.
Walsh
 Founder
and
Managing
Principal


 G2
Weather
Intelligence,
LLC
 Paul.Walsh@G2Weather.com

  • 2. G2
Weather
Intelligence,
LLC
 Helping
businesses
make
more
 money
by
proacCvely
planning
for
 the
influence
of
weather
on
 consumers
and
business
 ©
2008
G2
Weather
Intelligence,
LLC.

All

Rights
Reserved

  • 3. “Always check the weather report before you pray for rain.” ‐

Mark
Twain

  • 4. Managing
Weather‐Related
Uncertainty
 Three
components:
 1.  Understanding
value
at
risk
($)
 2.  OperaConal
management
(managing
the
knowable)
 Real‐Cme
   TacCcal
   Seasonal
   Very
long‐lead
Scenario
Planning
   3.  Financial
management
(hedging
the
unknowable)
   Weather
derivaCve
hedging
soluCons



  • 5. Trust,
but
Verify:

On
Seasonal
ForecasCng,
 Uncertainty,
and
Weather
Risk
Management
 •  Seasonal
forecasts
useful
for
 understanding
climate
trends
 and
anomalies
 •  Forecasts
based
on
large
scale
 interacCons
between
the
 ocean
and
atmosphere
 •  OperaDonal
decisions
shaped
 by
probabiliDes
and
odds
vice
 absolutes
 •  Financial
hedging
used
to
 offset
the
uncertainty
inherent
 in
seasonal
forecast

  • 6. Spring
2009
Weather
Driver:


 La
Nina
Redux


  • 7. The
Pacific
Decadal
OscillaCon
(PDO)
 •  The
Pacific
 Decadal
 OscillaCon
(PDO)
 is
a
paXern
of
 Pacific
climate
 variability
that
 shiYs
phases
on
 at
least
inter‐ decadal
Cme
 scales,
usually
 about
20
to
30
 years



  • 8. A
New
Regime
of
Colder
Weather?
 ? ?
 “In
general,
the
climate
regime
no
longer
resembles
the
recent
warm
spell
of
the
last
 25
years.

The
persistence
of
the
very
cold
Pacific
Ocean
of
the
the
last
couple
of
years
 has
resulted
in
…
paKerns
more
similar
to
the
1950s‐1970s.


If
this
“old‐school”
 paKern
persists
much
longer,
the
global
oceans
will
conQnue
to
cool
off,
and
we
will
 likely
head
into
a
cooler
mulQ‐decadal
climate
regime.”
 



‐‐


Dr
Todd
Crawford,
WSI
Seasonal
Forecaster

  • 9. Typical
January
–
March
Weather
During
 Moderate
to
Strong
El
Nino
and
La
Nina

  • 10. Spring
2008
–
Strong
La
Nina

 Temperature
Anomaly

  • 11. Spring
2008
–
Strong
La
Nina

 PrecipitaCon
Anomaly

  • 12. US
Climate
PredicCon
Center
(CPC)
 
February
2009
 Temperature
Anomaly
Probability


 Northwest:

 73.3%
 probability
 83.3%
 normal/ probability
 colder
than
 normal/ normal


 warmer
than
 normal



  • 13. US
Climate
PredicCon
Center
(CPC)
 
February
‐
April
2009
 Temperature
Anomaly
Probability


 Northwest:

 73.3%
 probability
 Southwest
 normal/ Spring:

 colder
than
 73.3%
 normal


 probability
 normal/ warmer
than
 normal



  • 14. Weather
Services
InternaConal


 Seasonal
Temperature
Forecast
 February
–
March

2009
 March
–
May
2009
 “…
the
objecQve
models
are
in
unusually
good
agreement
for
the
February
–
April
 period,
showing
a
cold
period
across
much
of
the
western
and
northern
US
and
a
very
 mild
period
in
the
Southeast.”

Dr
Todd
Crawford,
WSI
Seasonal
Forecaster

  • 15. Weather
Services
InternaConal
(WSI)
 Monthly
Seasonal
Temperature
Forecast
 February
2009
 March
2009
 April
2009

  • 16. US
Climate
PredicCon
Center
(CPC)
 
February
2009
 PrecipitaCon
Anomaly
Probability


 Northwest:

 73.3%
 probability
 83.3%
 normal/ probability
 colder
than
 normal/ normal


 wePer
than
 normal



  • 17. CPC
February
‐
April
2009
 PrecipitaCon
Anomaly
Forecast
 Ohio
River
 Valley
73.3%
 probability
 normal/ Florida
 wePer
than

 83.3%
 normal
 probability
 normal/ drier
than
 normal
 Southwest
73.3%
 probability
 normal/drier
 than
normal

  • 18. Weather
Services
InternaConal


 Seasonal
PrecipitaCon
Probability
Forecast
 February
–
March

2009
 March
–
May
2009
 Good
forecast
agreement
re:
dryness
in
Florida
and
the
 southwest/west
Texas.



  • 19. Drought
Monitor
and
Forecast
Through
April
2009
 Drought
condiCons
to
persist
and
worsen
in
 California
and
Texas
and
develop
in
Florida.


  • 20. 2009
Hurricane
Season
Outlooks
 Consensus
to
date:

below
the
10‐year
moving
average
but
 above
the
long‐term
average.
Updates
available
at
 G2Weather.com
as
the
season
progresses

  • 21. Financial
Weather
Hedging


 •  Companies
use
derivaCves
(currency,
fuel,
interest
 rates,
etc)
to
manage
uncertainty
 •  Weather
derivaCve
soluCons
are
a
form
of
financial
 protecCon
designed
to
reduce
revenue
volaClity
 caused
by
changes
in
weather
 –  Payouts
triggered
based
on
government
(NOAA)
weather
 data
 –  No
proof
of
loss
necessary
 –  Temperature
and
hurricane
futures
and
opCons
traded
at
 the
CME

  • 22. CME
Group
Weather
Volume
&
Open
Interest
 Open Interest (thousands) Volume (thousands) Volume
 Open
Interest

  • 23. Summary
 •  Weather
uncertainty
managed
using
operaConal
and
 financial
soluCons
 –  Goal:

to
become
weather‐risk
neutral
 •  Spring
2008
climate
risk
consensus
 –  La
Nina
influenced
climate;
potenCally
similar
to
2008
 –  Cold
and
wet
in
the
north;
wet
in
the
central/Midwest
US
 –  Drought
in
the
southeast
(Florida),
southwest,
and
 California
 •  Hurricane
risk
conCnues
to
be
elevated
 –  Consensus
for
below
the
near‐term
average
but
above
the
 long‐term
(30‐year)
normal

  • 24. QuesCons?

 Paul
Walsh,
G2
Weather
Intelligence
LLC
 –  Paul.Walsh@G2Weather.com
 –  Direct:



+1.917.463.4238
 –  Mobile:

+1.610.246.0623
 –  Blog/Website:

www.G2Weather.com
 “Changing
the
 way
business
 thinks
about
 the
weather”

  • 25. AddiConal
Contact
Info
 Weather
DerivaDve
SoluDons
 CME
Group
 ChrisCna
Hanson,
Associate
Director,
AlternaCve
Investment
 •  chrisCna.hanson.slimack@cmegroup.com

 •  312‐930‐1308

 •  Weather
Data
SoluDons
 WSI
Ag
Trader
 Dave
Smith

 •  dasmith@wsi.com

 •  978.983.6786

 •  “Changing
the
 way
business
 thinks
about
 the
weather”