As the nation’s weather seems volatile, so too is the threat to agriculture and ag-related or ag-dependent industries.
Sensing that demand will increase for a way to offset or hedge against those threats, The Andersons Inc. recently made an investment in a Kansas brokerage firm that uses financial contracts to help companies offset the risk posed by unpredictable weather.
Joe Needham, corporate director of business development and public policy for The Andersons, said the Maumee-based agribusiness became a “significant minority investor” in eWeatherRisk of Overland Park, Kan., last week.
“We had made the decision last year that we wanted to be an investor [in eWeatherRisk] and by the time the drought came through we felt more strongly about it,” Mr. Needham said.
EWeatherRisk is an online brokerage firm that engages in weather risk management.
Weather risk management allows a business or institution — such as a food processor or a university — or individuals — such as farmers — to manage the financial consequences of adverse weather.
Companies like eWeatherRisk conduct commercial trading of weather risk, both directly between parities or in conjunction with commodities markets.
In practice, a business whose operations can be affected by weather will pay a premium to a risk-taker who assumes that risk, which is defined in terms of a weather element, according to the Washington, D.C.-based Weather Risk Management Association.
For example, the risk may be that a certain amount of rainfall is needed for a business that grows trees, or that temperatures don’t fall below a certain degree in an area where crops are sensitive to cold.
A contract for that risk is offered on the Chicago Mercantile Exchange and an investor or investors will accept that contract and agree to pay the business offering the contract an amount of money that corresponds to the loss or cost increase caused by the weather. If the adverse weather doesn’t happen, the investor (or risk taker) keeps the premium.
Bloomberg News reported that a Kansas farmer with 6,000 acres contracted with eWeatherRisk to pay $25,000 for $200,000 worth of heat and rainfall protection for his soybeans.
Mr. Needham said farmers have lots of options to buy crop insurance, but other businesses, such as ethanol producers or food producers, don’t have those options. That’s where hedge contracts through firms like eWeatherRisk are valuable.
“Say you have a fertilizer dealer or a retail center that sells fertilizer. If there’s a lot of rain during planting season, they can’t sell that fertilizer,” Mr. Needham said. “There’s a lot of studies that show weather volatility is increasing and that there’s a lot of need for some kind of insurance,” he added.
The added backing of The Andersons should provide eWeatherRisk with more resources for marketing and expansion.
Brian O’Hearne, chief executive of eWeatherRisk, said in a statement that The Andersons will support eWeatherRisk’s business expansion with both its Web site and private-party, weather-risk contracting in agricultural and other weather sensitive markets.
“We are excited to bring The Andersons’ vast experience in agriculture, transportation, and risk management to this new relationship,” he said.
Contact Jon Chavez at: email@example.com or 419-724-6128.