Rain, rain go away, come again another day, Little Johny wants to play….
It is not just little Johny who dislikes a bad rain, farmers, traders, power producers, miners, plantations just about everyone from all walks of life. Even when rain comes soothing after a hot day, everyone still wants protection.
Now following the successful launch of exchange-traded weather Futures in United States under Chicago Mercantile Exchange (CME), one Hyderabad-based company, Weather Risk Management Services (WRMS) is planning to launch a weather trading platform in the country for the first time. According to CME, weather affects economies around the world and according to estimates, directly affects at least one third of businesses.
“The weather trading platform in India will be launched as soon as we get approval from Forward Markets Commission,” according to Sonu Agarwal, managing director of WRMS. The trading platform would allow one to buy or sell the value of a temperature and precipitation (rain) index at a specific future date.
While power companies such as Reliance Power or NTPC can trade in high-degree days (HDD) and low-degree days (LDD) contracts in Mumbai and estimate how much electricity could be consumed during those days, farmers can use weather derivatives to hedge against poor harvests caused by drought.
In USA, CME Group allows people to trade in weather conditions in 36 cities around the world 18 in the US, 6 in Canada, 9 in Europe, 2 in Japan average weekly, monthly and seasonal temperatures in select locations, frost and snowfall in select locations as also hurricanes in select locations. WRMS was incubated out of Indian Institute of Technology-Kanpur and Small Industries Development Bank of India Innovation Centre.
WRMS claims to have played a pioneering role in developing the Indian weather market which in a short span of 2 years has grown to a size of approx $20 mn (Total contract value). WRMS says it has a diverse clientele, including premiere agricultural companies such as ITC, Dupont Mayhco, JK Seeds, Excel Crop care etc, Microfinance institutions such as Basix, Care, Sadhan and prominent Airlines & Energy utilities.
The company reaches over 200,000 Indian farmers, according to its website. To facilitate future growth, the company is building a state-of-the-art weather & disaster research and analytics centre at the country’s most reputed Engineering Research Institute The Indian Institute of Technology-Kanpur (IIT-K). Eminent experts in the area of mathematics, statistics, design and finance are associated with it in this endeavour.
Sonu Agarwal, managing director of WRMS, said the existing national agriculture insurance scheme didn’t address farmers’ concerns. The claim settlement process was long and the scheme was proving costly to the government exchequer. The risks in Indian agriculture were largely attributable to weather.
“Therefore, it was felt that insuring crop losses through weather indices could be a good idea. The weather indices could be used to settle claims due to agricultural loss on almost a real time basis. Further these indices could be traded enabling reduction in cost of risk transfer,” he told Commodity Market.
The exchange will be launched by June this year. The total transaction at the trading platform in the first 6-12 months is expected to touch Rs 10,000 crore. Even when such estimates are released WRMS does not reveal how the system will work. Whether a separate exchange will be set or whether the derivatives will be traded on existing commodity exchanges and other issues?
To Commodity Market’s queries regarding trading margins and whether a separate exchange will be set up, Sonu Agarwal said such information cannot be shared because of legal obligations binding the company. What is the logic behind putting 18 degree centigrade as the benchmark temperature value? For example in some fruit growing regions, it could be lesser most of the time but still work out fine for that kind of crops?
Sonu Agarwal said the temperature indices are being primarily created for energy utilities, 18 degree is an established cut off point for turning on or off cooling and heating appliances. He said there will be separate derivatives for rainfall, drought, temperature and other weather parameters. Sonu Agarwal said the response to weather insurance based on weather-based indices has been overwhelming.
Over 10 lakh farmers have voluntarily opted for weather index linked insurance. Couple of state governments have replaced their earlier agriculture insurance schemes with weather-index based schemes. Regarding other services provided by WRMS, Sonu Agarwal said they provide agro-advisory services to farmers and agricultural entities.
These services are offered realtime on PC and mobile platform. Farmers can know the impact of weather condition on their crops real time and can take suitable measures. There are modules which help farmers formulate optimal irrigation and harvest plans. WRMS is also launching weather insurance for the renewable energy sector.
Hydropower companies can insure themselves against loss of generation due to insufficient water flow in their base reservoirs. Wind mills can protect themselves against loss inadequate wind speed. WRMS has also announced that an online-trading game will be set up to create awareness about weather derivatives. There are some like the reader of a leading business daily who fears that weather trading could become another speculative activity on a platform with legal sanctity.
“Our insurance products should be based on risk avoidance, risk reduction or risk transfer and not based on pure speculation,” he wrote in response to a news item that WRMS is launching weather derivates. As of now it is not yet clear what form the new weather trading platform will have as the company is itself not revealing much. However, the success of this platform will depend on bringing as many real stake holders to hedge against weather risks and avoid controversies regarding pure speculation. •
This article published in COMMODITY MARKTE, India’s No 1 news magazine on commodities.
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