Indian Weather Markets..

Weather Risk Management Services Pvt. Ltd.

Read how organizations describe
their exposure
Indian Market
o EID Parry sales, net down 86 pc on monsoon failure. - The Hindu, Jan 17,
2003
o The Company's business is seasonal in nature and the performance can be
impacted by weather conditions - Notes to Accounts, Syngenta (I) Ltd.
o Monsanto India continued its strong profit growth on the back of positive all-
round business performance aided by a good monsoon. - Annual Report
2003-04, Monsanto Ltd
o The delayed monsoon has hit the fertilizer stocks badly. - Analyst, Hindu
Business Line
o Over 1000 farmers commit suicide in vidarbha and Telangana in last two
years TOI
o An average drought costs upto Rs 4 bn to the state exchequer,Gujarat
earthquake resulted in direct damages of about Rs.153 billion -NDMC


Indian Market
Impacts Yields
10000
15000
20000
25000
30000
35000
40000
45000
1 2 3 4 5 6 7 8 9 10 11 12 13
years
p
r
o
d
u
c
t
i
o
n
-3000
-2000
-1000
0
1000
2000
3000
F
u
n
c
t
i
o
n
(
r
a
i
n
f
a
l
l
*
t
e
m
p
)
70000
75000
80000
85000
90000
95000
100000
Production
year
p
r
o
d
u
c
t
i
o
n
-10000000
-5000000
0
5000000
10000000
15000000
20000000
F
u
n
c
t
i
o
n

o
f

r
a
i
n
*
t
e
m
p
Impacts on Acreages
Impact on Prices
2003 2004 2005 2006
Area Sown 40.908 44.439 41.922 45.501
Yield in
Kg/Hect
1019
824 796

Prices before
sowing (May &
June & July)
1610 1520 1380
1810 1680 1839
1268 1285 1301 1323 1260 1263
Rainfall Actual % Dep Price Actual % Dep Price Actual % Dep Price Actual % Dep Price
June 129 22 1520 81 -25 1680 82 -24 1285 26 -83 1260
July 315 3
1380
215 -30
1839
379 24
1301
282 1 1263
Aug 216 -32 1250 423 34 1891 132
-58 1265
459 58 1261
Sept 259 45
1380
47
-73
1724 165
-6
1218 257 57 1238
Impact of Weather on Farming
o Makes the earnings volatile, Affects working capital
repayment
o Affects contractual obligation
o In plantations/ corporate Farming Fixed : Variable cost
ratio is high
o High Fixed Costs puts profits under pressure
When production reduces in the key producing months
Happens primarily on account of weather
o Possibly affects expansion plan when price outlook is
positive

Impact of Weather on Farming
15 May-10
June

11 June 31
July
Aug 1 Sep 30
Establishment
Flowering &
Veg Growth
Pod Formation &
Maturity
60mm
160mm
100mm
Rainfall
Index:
Stages:
Time:
Which crop
to go for ??
When to apply
pesticides ??
When to
harvest ??
Seed Sale = f (Acreages, Competition)
Acreage = f (Onset, Price, Credit)
Seed Sale = f (Acreages, Competition)
Acreage = f (Monsoon Onset, Price, Credit)
Around 60% sowing
finishes by 20th July
Effect of last years prices on acreage
0
1
2
3
2004 2005 2006
a
c
r
e
a
g
e

(
l
h
a
)
0
500
1000
1500
2000
l
a
s
t

y
e
a
r
s

a
v

p
r
i
c
e
(
R
s
)
Buldana Nagpur Last yrs price(Rs)
Seed Sale = f (Acreages, Competition)
Acreage = f (Monsoon Onset, Price, Credit)

Pesticides Sale = f (Acreages, Weather
Conditions during Vegetative growth,
Competition)

Pesticides Sale = f (Acreages, Weather
Conditions during Vegetative growth,
Competition)
Weather & Agri-Value Chain
Farmer
Fertilizers
Seed
Pesticides
Farm Equipment
Agro-processor
Farmer
Fertilizers
Seed
Pesticides
Farm Equipment
Agro-processor
Farmer
Fertilizers
Seed
Pesticides
Farm Equipment
Agro-processor
Credit
Risk
Value Destruction - Weather
Higher Inventory
Loss of sales
opportunity
Weather Becoming More Extreme
o Extreme rainfall incidents have seen a huge jump in recent decades
over northwest India (including Maharashtra and Gujarat) during the
summer monsoon

o Orissa has been reeling under contrasting extreme weather
conditions for more than a decade: from heat waves to cyclones and
from droughts to floods. The death toll due to heat waves in
Rajasthan, Punjab, Gujarat, and Bihar is on the rise

o The coastal regions have been undergoing stronger wind and flood
damage due to storm surges associated with more intense tropical
storms in recent years. Frequent inundation of low lying areas, more
flooding and increase in the salinity of rivers, bays and aquifers in the
coastal regions have occurred more often during the past decade.
Weather risk management
Financial weather risk is the occurrence of an observable
weather event or variability in a measurable weather index
that causes losses either to property or profits for an
individual, government or corporation.
Weather risk management products packaged as either
(re)insurance or derivatives are settled off of the same
index that has been determined to cause losses and
reduces weather risk through mitigating payouts.
Manageable weather risks
Temperature
Precipitation
Snowfall
Wind Speed
Streamflow
Sunshine hours
Soil Moisture
Humidity
Hurricanes
A WEATHER INDEX IS GENERALLY CONSTRUCTED AS A FUNCTION OF
FREQUENCY OF OCCURRENCE AND MAGNITUDE OF EVENT
PRICE VOLUME REVENUE x =
PRICE RISK
MANAGEMENT
WEATHER RISK
MANAGEMENT
LOWER
EARNINGS
VOLATILITY
+
Weather impacts volume
Less volatility equals greater value
U/H H
Earnings $75 M $73 M
EPS $0.75 $0.73
Multiple 8x 9x
Stock Price $6.00 $6.57
Market Cap $600MM $657MM
Debt $100 M $100 M
COD 8.00 % 7.90 %
Debt Svc $8.0MM $7.9MM
Historical Revenues
UNHEDGED
Expected Revenues
Without Weather
Protection
$75 Million
HEDGED
Expected Revenues
With Weather
Protection
$73 Million
Reducing the volatility due to weather has a budget cost but increases
returns per unit of risk and can potentially improve stock valuations and
the cost of/access to financing.
Sales Expansion Thru Weather Insurance
Example (Case for possible expansion in sales, faced with high weather risk)
Threshold return on capital 25%
Budget capital 250 lacs
Without Weather Insurance
Sales in an area 160 lacs
Potential profit in an area 50 lacs Lower profits due to lack of scale
Risk Capital Employed due to
Non Weather Risks 160 lacs Assumed @ Rs 1 per unit of sales
Risk Capital employed due to
weather 96 lacs Assumed @ Rs. 0.6 per unit of sales
Return on capital employed 20%
With Weather Insurance
Potential sales in an area 250 Improved sales
Potential profit in an area 125 Improved profits due to larger scale
Weather Insurance Premium 12 @ 8% of Risk Capital due to weather
Profit after Insurance 113
Risk Capital Employed due to
Non Weather Risks 250 Assumed @ Rs 1 per unit of sales
Risk Capital employed due to
weather 0
Return on capital employed 45% Beating return on capital threshold
Sales can be expanded in several areas where sales are presently subdued due to weather risks
Larger scale may also ensure
reduction in price of seeds, thereby
facilitating sales
Several precautionary measures built
in sales process to tackle weather risk,
which inhibit sales; scope for process
improvement
Processing of data received
from sensors and converting
it according to specific
product
On Site wireless Sensors

Farmers Console (GIS)

Organizing Real Time Data
o Covering important
agricultural zones real
time, at a cost of approx.
Rs.500 per sq.km or Rs.5
per ha

o Generation of Historical
records for any given
long.- lat. Position
Statistical & Neural
Network model
o Building UAV and
Advanced remote sensing
applications to assist this


Spatial Interpolation
RMS error ( under
square root
transformation) ~
2mm
Decision Support System
Identification
&
Quantification
of the Risk
Current
Weather
Data
Forecast
Inputs
-Crop Planning
-Irrigation planning
-Pest Management
-Yield forecast
-Risk Transfer
Front-end Output
Scientific
modeling of
risk
Simplified
output in
vernacular
language for
farmers
Needs to be customized for Banks portfolio
Hybrid Products Filling the Gap
Thank you
El Nino/La Nina association with all-India summer monsoon rainfall anomalies
during 1871-2001
Number of
years with

Deficient
monsoon
Deficit>10
%
Normal
monsoon(-
ve)
Normal
monsoon
(+ve)

Excess
monsoon
excess>10
%
Total
El Nino
11 11

4

0

26

La Nina

0 1

9

8

18

Other

11

23

42

11

87

Total

22

35

55

19

131

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