Friday, December 21, 2007

Who needs weather derivatives?

Once I was chatting with a kabab vendor on the streetside. I asked him "What problems do you face?". He said that it was Id that day, and he faces a massive risk. If the crescent moon is sighted, he gets flooded with business, and runs out of chicken. If it's cloudy, and the moon is not sighted, then he is holding too much inventory of chicken and it gets wasted. I thought to myself: Wouldn't it be neat if he could get a contract that pays if it's cloudy.

The New York Times has a fascinating story on a new place where weather derivatives are useful. They describe applications in the apparel industry :

And the manufacturer Weatherproof, which supplies coats to major department stores, has bought what amounts to a $10 million insurance policy against unusually warm weather, apparently a first in the clothing business.

Fredric Stollmack, the president of Weatherproof, said that unseasonable weather, once a widely mocked excuse for poor performance in the industry, is the new norm, forcing companies to make sweeping changes in how they manufacture and sell clothing.

...

For Weatherproof, forecasts and climatologists are not enough. The majority of the companys business is done in November and December and if the weather is unusually warm, as it was during those months last year, sales plunge. (The last several months were not much better, with August, September and October combined the warmest ever recorded for six states, according to Planalytics, a weather research firm.)

So in a closely watched experiment, Weatherproof signed a contract that guarantees it would be paid as much as $10 million if daily temperatures in New York City are warmer than the historical average for December, 37 degrees. The higher the temperature this month, the more money Weatherproof will be paid.

Weatherproof bought its coverage from a 1-year-old company called Storm Exchange, which also sells such contracts to oil and electricity companies.

3 comments:

  1. Also, anecdotally, people who own ski resorts are known to use weather derivatives.

    ReplyDelete
  2. WeatherBill sells weather derivatives to Ski Resorts. A quote from a recent Red Herring article on WeatherBill.


    One of WeatherBill’s clients, Arizona ski resort Flagstaff Nordic Center, took out a contract that allows it to offer those who purchase a season pass before November 1 refunds if the area does not get about 2 feet of snow during the ski season. Other clients include farmers, restaurants, and event organizers.


    Full refund on season passes if it doesn't snow enough? Count me in!

    Full text of the Red Herring article.

    ReplyDelete
  3. People who own the top ski resorts know that the best of all:)

    ReplyDelete

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