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Pennies For a Rainy Day
by Regina Sisky

After two years of unseasonable weather conditions that have diminished global wheat crops and boosted market prices, experts say the wheat market has become a weather market. One of those experts, Emmanuel Jayet, agricultural commodities analyst at BNP Paribas SA, told Bloomberg this past December that the wheat market “is already quite nervous about the weather and it's only December; there is going to be a lot of volatility next year.''

“Weather is unpredictable. Your bottom line doesn’t have to be.” That’s the motto of WeatherBill, an innovative company utilizing web based technology to offer a new financial tool to growers and others who depend on crops. That’s a sunny outlook for a volatile commodity market like grain.

WeatherBill’s concept is simple: get paid for bad weather. Growers do so by creating custom weather contracts to protect revenue from the impact of severe weather. WeatherBill is the pioneer in bringing user defined contracts to any size business in a variety of industries; however it is not the first company to identify the need to protect against weather risk.

A decade ago, Fortune 100 companies began using futures contracts to protect their profits from weather. Soon after the contracts were created, weather officially became a commodity that traded on the Chicago Mercantile Exchange. Multi-billion dollar companies were essentially buying ideal weather conditions to ensure predictable profits. At the time, weather futures were extremely expensive and complicated, requiring throngs of lawyers and large bank accounts.

These costs and complications (and the fact that the futures were too general) made the futures a poor fit for smaller businesses. In 2007 WeatherBill was founded and began allowing any business, regardless of size, to create and purchase custom weather futures contracts. WeatherBill turned the complex, expensive and opaque weather future into a transparent, customizable and affordable tool for businesses to protect profits and prevent weather-driven costs from impacting revenue.

WeatherBill futures contracts, simply called “weatherbills,” are similar to insurance in that business owners pay a premium for protection. Unlike insurance, proof of loss is not required for a Weatherbill to pay out. When the time period defined in the contract expires, WeatherBill pays out on applicable data as reported by a government-affiliated weather station. In other words, when the contract ends and the bad weather happened, the business holding the contract is paid instantly. A Weatherbill payout is based on an absolute measurement as opposed to a subjective, human assessment that requires a claims process.

Weatherbills are custom contracts, allowing the user to define the exact dates of risk, location of risk (from more than 370 locations in the United States), weather trigger for payment (rain, drought, heat or frost), amount of payment for bad weather, and any deductible. Weatherbills can be priced and purchased instantly, year round, as few as four days before the desired protection period. There is one stipulation set by the United States government in purchasing these contracts: businesses must meet or surpass a $1 million threshold to participate.

WeatherBill’s clients include professional golf tournaments, travel companies and ski areas but many of the company’s earliest adopters were farmers. Agriculture is the backbone of the global economy and is extremely weather sensitive. In addition to protecting crops, farmers have a unique need to protect and stabilize revenue from the effect of bad weather. WeatherBill offers protection against too much rain, drought, heat and freezing temperatures.

Take winter wheat, for example. Kansas State University’s Manhattan Extension has produced extensive research on the weather sensitivity of winter wheat. “The degree of injury to wheat from spring freezes is influenced by the duration of the low temperatures as well as the low temperature reached,” wr0te James P. Shroyer, Merrel E. Mikesell, and Gary M. Paulsen in 1995’s Spring Freeze Injury to Kansas Wheat report. Wheat at the heading stage requires temperatures of 30°F or lower for at least two hours to suffer significant injury and 28°F at the booting stage.

A winter wheat producer near Hobart, Oklahoma, would create a Weatherbill online or over the phone to protect against freezing temperatures between April 7th and May 7th. The producer first decides how much he wants to get paid if and when the freezing temperatures are measured by the National Weather Service station in Hobart. He wants to recover $160 per acre if the temperatures dip below 26°F. Based on that information, the price of the contract would be $18.61 per acre. This contract would have paid in both 2003 and 1997, when a mid-April frost damaged crops in Texas, Oklahoma and Kansas.

The contract options are endless. To price your own contract and learn more about WeatherBill, visit www.weatherbill.com or call 888.924.7478.

Catastrophic coverage (CAT) WeatherBill
Protects Yield Risk Protects Price Risk
Payout Is Subjective Payment Is Based On Government’s Weather Measurements
Pays For Severe Production Loss (Requiring Proof Of Damage, I.e. Paperwork) Pays For Bad Weather, Not Loss (No Paperwork Or Claims Process)
September Purchase Deadline Can Be Purchased Year Round Up To Four Days In Advance Of Desired Protection Period
Requires Written Notice Of Loss Within 72 Hours Of Discovery Of Damage Or Loss; 15 Days Before Harvest Begins, And Within 15 Days After Harvesting Is Completed. Pays Instantly
Production History Required Production History Not Required
No Replant Payment No Replant Payment
Insured Notice Of Loss Required Does Not Require Insured Notice Of Loss

 

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