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.
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Managing Weather Risk in Uncertain Times
- 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
- 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.
- 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
- 23. CME Group Weather Volume & Open Interest Open Interest (thousands) Volume (thousands) Volume Open Interest
- 24. 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
- 25. 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”
- 26. 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”