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Buy A Hedge Against The Weather

We can’t control the weather, and we’re still only marginally accurate at predicting it more than three days out. A new risk management tool, eWeatherRisk, can’t change that, however the hedging tool allows you to buy some protection against adverse conditions.

Brian O’Hearne, president of eWeatherRisk, says these weather risk contracts are financial instruments that complement — not replace — crop insurance. “Simply put, weather contracts enhance crop insurance and offer a new way for agribusinesses that do not have crop insurance to manage their weather risk exposure,” he says.

HEDGING THE WEATHER

Available through the website ( www.eweatherrisk.ca), weather risk contracts are developed, priced and purchased right from your desktop. They work like this:

A farmer goes to the website and locates a weather station or multiple weather stations close to his operation. From there, a farmer chooses what peril he’s worried about within a designated time period. Current options revolve around temperature and precipitation. For example, if you think it’s going to be a wet spring, you’d choose an excess moisture contract.

From here the farmer sets a time-line for the weather event to occur (or not). Once chosen, eWeather- Risk generates information regarding the chosen weather events that occurred in the last 60 years. This way, farmers can judge how far outside of average, and how likely, a specific event is. The contract value or parameters can then be changed, to reflect how bullish or bearish you feel about the weather. Once the farmer has completed their weather risk strategy and has a price (it calculates this all for you), with one click they can purchase the weather contract and print out the contractual documents.

Other contract options include: lowest (or highest) temperature in a calendar period, too few growing degree days or too little or too much rain.

14-DAY WINDOW

Unlike crop insurance with a drop-dead deadline, eWeatherRisk contracts can be taken out several times throughout a growing season for as nearby as 14 days ahead. It’s not quite in line with the most accurate forecast, but it’s close. O’Hearne says that there are plans, as new stations come on line, to close the contracting window even tighter. Of course, as certainty of payout increases, so would the premium.

One of the interesting parts of these weather contracts is that there is no proof of loss. If you contract for excess moisture, at the chosen weather station, in a given time period and it happens, you receive a payout (on a sliding scale). Whether or not that excess moisture drowned out your crop or not makes no difference. Just like a hedge in the stock market, a payout on the weather contract likely means a loss out in the field, but, as 2010 proved, crops can come through some extreme weather and still offer average yields.

COST

What does all this cost? Well, that depends. As a farmer, you choose the size of the contract (as an example, let’s use $100,000). Depending on the perils you choose (you can set up several within the same contract) and the level of coverage, your premium will sit somewhere around the 10 to 15 per cent mark, depending on where you choose to be covered.

Payouts are graduated, for example, if you contract on excess moisture that pays $1,000 per mm above 100 mm and it rains 125 mm, you’d be paid $1,000 for each mm ($25,000). Had it only rained 115 mm, you’d receive only $15,000. If you had set up a contract with a 10 per cent premium, and that would be shown up front, you’d walk away with $5,000 in your pocket (according to the last example). It’s up to you to weigh whether or not that excess moisture caused you more than $5,000 in losses out in the field. Of course, if it had rained 200 mm, you would have been paid the full $100,000.

IMPROVEMENTS GOING FORWARD

There’s still work to be done on helping farmers determine what size of contract to purchase. The hedge is designed to compliment crop insurance and guard the portion of production not covered by it. That said, choosing a valuation for that portion of the crop is dependent on things like crop type and prices.

The other area eWeatherRisk is improving on is weather station coverage. As it stands, there are 250 weather stations to contract off of. The company is already building on that network and has a goal of more than tripling that number in the coming years. For those farmers with land very close to existing stations, the data would be very accurate. The problem is, current stations that meet eWeatherisk’s standards aren’t as numerous as they’d like.

Farmers interested should also note that an eWeatherRisk contract requires no proof of loss — the weather event or accumulation either happens or does not and a payout is triggered or not. As an example, if the excessive rainfall happens during the time your stipulated, you collect, but have possibly lost production. If the weather event doesn’t happen, you’ve paid your premium, but have a crop to sell. It works just like a hedge on the futures market.

Those interested in eWeather- Risk can contact the company at 1-800-603-3605 or visit www.eweatherrisk.ca, or email Brian O’Hearne at Brian. [email protected] Because it’s a novel product, farmers are encouraged to work with the company’s partners Agri-Trend Agrology and other retailers to get comfortable with the program.

LyndseySmithiseditorofGrainews.Contact

herat [email protected]

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