CommodityRiskManagementConferenceManagingWeatherRiskinUncertainTimes

PaulE.WalshFounderandManagingPrincipalG2WeatherIntelligence,LLC

Paul.Walsh@G2Weather.com

G2WeatherIntelligence,LLC

©2008G2WeatherIntelligence,LLC.AllRightsReserved

HelpingbusinessesmakemoremoneybyproacCvelyplanningfortheinfluenceofweatheronconsumersandbusiness

“Always check the weather

report before you pray for

rain.”

‐MarkTwain

ManagingWeather‐RelatedUncertainty

Threecomponents:1.  Understandingvalueatrisk($)2.  OperaConalmanagement(managingtheknowable)

  Real‐Cme

  TacCcal  Seasonal

  Verylong‐leadScenarioPlanning

3.  Financialmanagement(hedgingtheunknowable)  WeatherderivaCvehedgingsoluCons

Trust,butVerify:OnSeasonalForecasCng,Uncertainty,andWeatherRiskManagement

•  Seasonalforecastsusefulforunderstandingclimatetrendsandanomalies

•  ForecastsbasedonlargescaleinteracConsbetweentheoceanandatmosphere

•  OperaDonaldecisionsshapedbyprobabiliDesandoddsviceabsolutes

•  Financialhedgingusedtooffsettheuncertaintyinherentinseasonalforecast

Spring2009WeatherDriver:LaNinaRedux

ThePacificDecadalOscillaCon(PDO)

•  ThePacificDecadalOscillaCon(PDO)isapaXernofPacificclimatevariabilitythatshiYsphasesonatleastinter‐decadalCmescales,usuallyabout20to30years

ANewRegimeofColderWeather?

??

“Ingeneral,theclimateregimenolongerresemblestherecentwarmspellofthelast25years.ThepersistenceoftheverycoldPacificOceanofthethelastcoupleofyearshasresultedin…paKernsmoresimilartothe1950s‐1970s.Ifthis“old‐school”paKernpersistsmuchlonger,theglobaloceanswillconQnuetocooloff,andwewilllikelyheadintoacoolermulQ‐decadalclimateregime.”‐‐DrToddCrawford,WSISeasonalForecaster

TypicalJanuary–MarchWeatherDuringModeratetoStrongElNinoandLaNina

Spring2008–StrongLaNinaTemperatureAnomaly

Spring2008–StrongLaNinaPrecipitaConAnomaly

USClimatePredicConCenter(CPC)February2009

TemperatureAnomalyProbability

83.3%probabilitynormal/

warmerthannormal

Northwest:73.3%

probabilitynormal/

colderthannormal

USClimatePredicConCenter(CPC)February‐April2009

TemperatureAnomalyProbability

SouthwestSpring:73.3%

probabilitynormal/

warmerthannormal

Northwest:73.3%

probabilitynormal/

colderthannormal

WeatherServicesInternaConalSeasonalTemperatureForecast

February–March2009 March–May2009

“…theobjecQvemodelsareinunusuallygoodagreementfortheFebruary–Aprilperiod,showingacoldperiodacrossmuchofthewesternandnorthernUSandaverymildperiodintheSoutheast.”DrToddCrawford,WSISeasonalForecaster

WeatherServicesInternaConal(WSI)MonthlySeasonalTemperatureForecast

February2009 March2009 April2009

USClimatePredicConCenter(CPC)February2009

PrecipitaConAnomalyProbability

83.3%probabilitynormal/

wePerthannormal

Northwest:73.3%

probabilitynormal/

colderthannormal

CPCFebruary‐April2009PrecipitaConAnomalyForecast

Florida83.3%

probabilitynormal/drierthannormal

OhioRiverValley73.3%probabilitynormal/

wePerthannormal

Southwest73.3%probability

normal/drierthannormal

WeatherServicesInternaConalSeasonalPrecipitaConProbabilityForecast

February–March2009 March–May2009

Goodforecastagreementre:drynessinFloridaandthesouthwest/westTexas.

DroughtMonitorandForecastThroughApril2009

DroughtcondiConstopersistandworseninCaliforniaandTexasanddevelopinFlorida.

2009HurricaneSeasonOutlooks

Consensustodate:belowthe10‐yearmovingaveragebutabovethelong‐termaverage.UpdatesavailableatG2Weather.comastheseasonprogresses

FinancialWeatherHedging

•  CompaniesusederivaCves(currency,fuel,interestrates,etc)tomanageuncertainty

•  WeatherderivaCvesoluConsareaformoffinancialprotecCondesignedtoreducerevenuevolaClitycausedbychangesinweather

–  Payoutstriggeredbasedongovernment(NOAA)weatherdata

–  Noproofoflossnecessary–  TemperatureandhurricanefuturesandopConstradedattheCME

CMEGroupWeatherVolume&OpenInterestVo

lum

e (th

ousa

nds)

O

pen Interest (thousands)

Volume

OpenInterest

Summary

•  WeatheruncertaintymanagedusingoperaConalandfinancialsoluCons–  Goal:tobecomeweather‐riskneutral

•  Spring2008climateriskconsensus–  LaNinainfluencedclimate;potenCallysimilarto2008–  Coldandwetinthenorth;wetinthecentral/MidwestUS–  Droughtinthesoutheast(Florida),southwest,andCalifornia

•  HurricaneriskconCnuestobeelevated–  Consensusforbelowthenear‐termaveragebutabovethelong‐term(30‐year)normal

QuesCons?

PaulWalsh,G2WeatherIntelligenceLLC

– Paul.Walsh@G2Weather.com

– Direct:+1.917.463.4238– Mobile:+1.610.246.0623– Blog/Website:www.G2Weather.com

“Changingthewaybusinessthinksabouttheweather”

AddiConalContactInfo

WeatherDerivaDveSoluDons

CMEGroup•  ChrisCnaHanson,AssociateDirector,AlternaCveInvestment•  chrisCna.hanson.slimack@cmegroup.com•  312‐930‐1308

WeatherDataSoluDons

WSIAgTrader•  DaveSmith•  dasmith@wsi.com•  978.983.6786

“Changingthewaybusinessthinksabouttheweather”