weather derivative applications several case studies in the australia market will be analysed...

Weather Derivative Applications Weather Derivative Applications Weather Derivative Applications Weather Derivative Applications • Several Case Studies in the Australia Market will be

analysed including:

• Several Case Studies in the Australia Market will be analysed including:

Weather Derivatives

Theme Park

Mining

Power

GasAgricultural

Clothing Brewing

Ice Cream

Air ConditioningSoft Drink Sectors

Weather Derivative Navigation Weather Derivative Navigation Weather Derivative Navigation Weather Derivative Navigation AgriculturalAgricultural Ice CreamIce Cream

Air ConditioningAir Conditioning

MiningMining

Soft DrinkSoft DrinkTheme ParksTheme Parks

BrewingBrewing

ClothingClothing

PowerPower

GasGas

Applications: Agricultural (1)Applications: Agricultural (1)

• From plantation to harvest, precipitation, temperature, sunshine hours and wind can affect the quality and quantity of a crop.

• While there is a strong correlation between fluctuations in crop production volumes and the weather.

• From plantation to harvest, precipitation, temperature, sunshine hours and wind can affect the quality and quantity of a crop.

• While there is a strong correlation between fluctuations in crop production volumes and the weather.

Applications: Agricultural (2)Applications: Agricultural (2)

BACK

Applications: Theme Parks (1)Applications: Theme Parks (1)

• Despite outstanding marketing campaigns and new state-of-the-art rides, theme parks with open-air attractions are critically weather sensitive.

• From a slight mist to torrential thunderstorms, adverse weather conditions reduce the number of visitors to a park, and may delay vital maintenance work when the park is closed to the public.

• Despite outstanding marketing campaigns and new state-of-the-art rides, theme parks with open-air attractions are critically weather sensitive.

• From a slight mist to torrential thunderstorms, adverse weather conditions reduce the number of visitors to a park, and may delay vital maintenance work when the park is closed to the public.


BACK

Applications: Mining (1)Applications: Mining (1)

• Despite advances in mining processes and chemical technology, coal mines with open-air pits are still critically weather sensitive.

• If excess precipitation falls, the potential of physical mining deteriorates as drilling activity is reduced and coal already mined becomes increasingly wet.

• Despite advances in mining processes and chemical technology, coal mines with open-air pits are still critically weather sensitive.

• If excess precipitation falls, the potential of physical mining deteriorates as drilling activity is reduced and coal already mined becomes increasingly wet.

Applications: Mining (2)Applications: Mining (2)

BACK

Applications: Power (1)Applications: Power (1)

• "Earnings from Australian operations were lower primarily because of abnormally warm winter temperatures in Victoria that affected both electric and gas operations.” A utilities company in Texas, November 1999

• Demand for electric power is volatile, dependent upon numerous unpredictable factors, including the weather. New risk management tools can help power generators mitigate the impact of extreme weather conditions.

• "Earnings from Australian operations were lower primarily because of abnormally warm winter temperatures in Victoria that affected both electric and gas operations.” A utilities company in Texas, November 1999

• Demand for electric power is volatile, dependent upon numerous unpredictable factors, including the weather. New risk management tools can help power generators mitigate the impact of extreme weather conditions.


BACK

Applications: Gas (1)Applications: Gas (1)

• Mild winters depress the volumetric demand for gas, whereas extraordinarily cold winters can significantly boost demand.

• Consequently, the profits of gas distributors can be very volatile.

• Mild winters depress the volumetric demand for gas, whereas extraordinarily cold winters can significantly boost demand.

• Consequently, the profits of gas distributors can be very volatile.


BACK

Applications: Air Conditioning (1)Applications: Air Conditioning (1)

• No matter how much a company may spend on outstanding marketing campaigns, if the weather is not hot enough at the beginning of the season, people will not buy outdoor furniture or air conditioning units.

• "Mild weather conditions in October, continuing into November, savaged sales of air conditioners and outdoor furniture."A leading retailer, 1999

• No matter how much a company may spend on outstanding marketing campaigns, if the weather is not hot enough at the beginning of the season, people will not buy outdoor furniture or air conditioning units.

• "Mild weather conditions in October, continuing into November, savaged sales of air conditioners and outdoor furniture."A leading retailer, 1999


• Historic sales statistics indicate that if the weather during the weeks leading up to summer does meet normal expectations, retailing profits will be severely impacted - the general public buys summer goods based on real need rather than potential need.

• "It is estimated that $13.93 million of earnings for the period from July 1999-October 1999 were affected by adverse weather conditions."One of Australia's

largest outdoor and electrical retailers

• Historic sales statistics indicate that if the weather during the weeks leading up to summer does meet normal expectations, retailing profits will be severely impacted - the general public buys summer goods based on real need rather than potential need.

• "It is estimated that $13.93 million of earnings for the period from July 1999-October 1999 were affected by adverse weather conditions."One of Australia's

largest outdoor and electrical retailers


BACK

Applications: Ice Cream (1) Applications: Ice Cream (1)

• Cold or wet summers have severe adverse effects on the volume of ice cream and icy pole sales. This may lead to downturn in profits for ice cream makers, and has even been cited as the reason why businesses have gone into receivership.

• An ice cream manufacturer in Adelaide typically expects to generate more than 50% of its annual revenue during the November-December period, but if these months prove to be unseasonably cool, sales suffer dramatically.

• Cold or wet summers have severe adverse effects on the volume of ice cream and icy pole sales. This may lead to downturn in profits for ice cream makers, and has even been cited as the reason why businesses have gone into receivership.

• An ice cream manufacturer in Adelaide typically expects to generate more than 50% of its annual revenue during the November-December period, but if these months prove to be unseasonably cool, sales suffer dramatically.

Applications: Ice Cream (2) Applications: Ice Cream (2)

BACK

Applications: Soft Drink (1)Applications: Soft Drink (1)

• The soft drink industry has a rich tradition of sales predictions based on the weather. Above average summer temperatures spur above average consumption growth, and although some drinks are more dependent on the climate than others, if two consecutive sunny and warm weekends occur, the demand for soft drinks is boosted for weeks ahead.

• The soft drink industry has a rich tradition of sales predictions based on the weather. Above average summer temperatures spur above average consumption growth, and although some drinks are more dependent on the climate than others, if two consecutive sunny and warm weekends occur, the demand for soft drinks is boosted for weeks ahead.

Applications: Soft Drink (2)Applications: Soft Drink (2)

BACK

Applications: Brewing (1)Applications: Brewing (1)• In 1998 the world beer market grew by 1.5% to

1,298 million hectolitres when compared to the previous year. However, the proportion of consumer expenditures on alcohol reached a 10-year low at 5.67%, leading to a decline in profit margin per unit of business. Although it is possible to estimate seasonal trading patterns, long-term meteorological forecasts continue to have limited accuracy, meaning that uncharacteristic weather patterns continue to have adverse effects on beer sales.

• In 1998 the world beer market grew by 1.5% to 1,298 million hectolitres when compared to the previous year. However, the proportion of consumer expenditures on alcohol reached a 10-year low at 5.67%, leading to a decline in profit margin per unit of business. Although it is possible to estimate seasonal trading patterns, long-term meteorological forecasts continue to have limited accuracy, meaning that uncharacteristic weather patterns continue to have adverse effects on beer sales.

Applications: Brewing (2)Applications: Brewing (2)

• A reduction in beer sales due to adverse weather conditions reduces brewery revenues and in some circumstances can force brewers to dump excess stock or store it at expense. Without any financial compensation, earnings can be dramatically affected. Now, however, risk management tools are available that allow brewers to hedge against the financial impact of bad weather, reducing their profit volatility and thereby leading to a lower cost of capital.

• A reduction in beer sales due to adverse weather conditions reduces brewery revenues and in some circumstances can force brewers to dump excess stock or store it at expense. Without any financial compensation, earnings can be dramatically affected. Now, however, risk management tools are available that allow brewers to hedge against the financial impact of bad weather, reducing their profit volatility and thereby leading to a lower cost of capital.


BACK

Applications: Clothing (1)Applications: Clothing (1)• Although fashion influences the style of the season,

the weather can dictate what is bought in stores. Unfortunately, as accurate long-range forecasts are still limited, stock is already on the floor by the time the weather actually arrives, and the forthcoming seasons sales are at the mercy of mother nature.

• Although fashion influences the style of the season, the weather can dictate what is bought in stores. Unfortunately, as accurate long-range forecasts are still limited, stock is already on the floor by the time the weather actually arrives, and the forthcoming seasons sales are at the mercy of mother nature.

Applications: Clothing (2)Applications: Clothing (2)• Although profits derived from clothing retailing are

also impacted by foreign exchange rates, taxes, costs of raw materials and labour, unemployment levels and the state of the national economy, the weather is recognised as a major influence on sales figures.

• Unseasonable summer weather can force discount sales to be brought forward, and if this is followed by a warmer than average autumn, summer sales stock will be sold rapidly whilst the full price autumn/winter lines remain on the shelf, leaving retailers with a significant downturn in profits.

• Although profits derived from clothing retailing are also impacted by foreign exchange rates, taxes, costs of raw materials and labour, unemployment levels and the state of the national economy, the weather is recognised as a major influence on sales figures.

• Unseasonable summer weather can force discount sales to be brought forward, and if this is followed by a warmer than average autumn, summer sales stock will be sold rapidly whilst the full price autumn/winter lines remain on the shelf, leaving retailers with a significant downturn in profits.

Applications: Clothing (3)Applications: Clothing (3)• A weather derivative could be structured to cover

the risk of warmer than average autumn/winter weather that leads to a drop in outwear and an increase in demand for cooler apparel that ultimately could not be met with existing stock.

• Although stock may be sold at reduced prices or taken back to a warehouse for storage, the effect on the balance sheet would be stabilised with compensatory payments from a weather derivative, guaranteeing minimum earnings and reducing cash flow volatility.

• A weather derivative could be structured to cover the risk of warmer than average autumn/winter weather that leads to a drop in outwear and an increase in demand for cooler apparel that ultimately could not be met with existing stock.

• Although stock may be sold at reduced prices or taken back to a warehouse for storage, the effect on the balance sheet would be stabilised with compensatory payments from a weather derivative, guaranteeing minimum earnings and reducing cash flow volatility.

Applications: Clothing (4)Applications: Clothing (4)

Dr Harvey Stern,Dr Harvey Stern,

Climate Manager, VictoriaClimate Manager, Victoria and and

Dr Harvey Stern,Dr Harvey Stern,

Climate Manager, VictoriaClimate Manager, Victoria and and

Griffith UniversityGriffith UniversityGriffith UniversityGriffith University

Mr Glen Dixon, Mr Glen Dixon, Associate Lecturer (Finance),Associate Lecturer (Finance),

BrisbaneBrisbane

Mr Glen Dixon, Mr Glen Dixon, Associate Lecturer (Finance),Associate Lecturer (Finance),

BrisbaneBrisbane

ThankyouThankyouThankyouThankyou

weather derivative applications several case studies in the australia market will be analysed...

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