Weathering the Commodities Crisis
Agriculture dominates the world's headlines, with news of rising prices and extreme weather sowing concern among farmers, governments and consumers almost daily. New weather risk management tools provide a ray of sunshine.
By Matthew Brodsky
Countries in Asia are withholding rice exports because their populations are going poor to pay for food. Australia has seen a drought two years running that's stunted wheat harvests to 60 percent of normal. U.S. biofuel plants are gobbling up corn faster than farmers can grow it. The dollar is weak, commodity prices have doubled. All these factors and then some have made agriculture a hot sector--"hot" as in meltdown. But also "hot" as in the creative and powerful ways in which agricultural producers have learned to deal with, and profit from, apparent calamity.
Their newest and most sophisticated weapons come out of the weather risk management arsenal.
Agribusiness in its many forms--food growers and processors, seed and fertilizer companies, feed lots, equipment manufacturers--has become one of the top consumers of weather products, says David Riker, CEO and president of Storm Exchange, a New York firm that helps clients grapple with weather risk.
Brian O'Hearne, managing director of environmental and commodity markets for Swiss Re, a global leader in weather risk management, has seen use of these tools by the agricultural sector take off.
The trend is only going to continue for large and small interests. "Given the prices of commodities these days and the volatility of weather," says Jeff Hamlin, director of business development for San Francisco-based WeatherBill, "people are going to look for ways to remove that unpredictability of weather from the impact on revenues."
Or as Riker puts it, "Plan for the expected, hedge for the unexpected weather."
Government-subsidized crop insurance, the old fav', is basically catastrophe cover for a 20-year disaster. The claims and collection process can be complicated and onerous, says Hamlin.
Commercially available weather products, on the other hand, allow agribusinesses "to get closer to the money" at cost-effective prices, O'Hearne says. The standard "weather playbook" is usually associated with the Chicago Mercantile Exchange, where a market exists for derivatives based on cooling degree days and heating degree days.