Storm Exchange assess impact of Midwest flooding

by Artemis on June 30, 2008

The recent Midwest floods have been pretty catastrophic and re/insurers are nervous at the extent of losses that may emerge as the full impact gets calculated and the claims start being filed. Storm Exchange, the weather risk management service company, have released a report detailing the extent of lossees that can be expected and of course some of the ways that those risks could be mitigated by hedging the weather.

Highlights of the report include:

  • Storm Exchange believe that the floods will impact up to 12 percent of total GDP output and 14 percent of corporate profits across a variety of industry groups including farming, food and beverage, railroads and trucking.
  • Approximately 1/3 of total U.S. corn crop and 30 percent of the total U.S. soybean crop were impacted by flood conditions in key Midwest growing region.
  • The closest historical analog to this kind of rainfall in the agricultural states is 1993, when corn prices jumped 15 percent and soy prices jumped 26 percent between June and July.
  • Several key industries in the transportation sector, including barges and railroads are expecting major earnings shortfalls as a result of the storms.
  • More than 75 percent of processed foods contain corn, either as starch, sweetener or protein. A major supply interruption will exert further inflationary pressure on food prices.
  • In May, Storm Exchange projected that U.S. corn yield would be 7 percent below trend this year, largely predicated on delayed planting dates and cold, wet seed beds. Corn yields may now be as much as much as 10-12 percent below trend. Over the last 12 months, Storm Exchange has accurately predicted weather-related shortfalls in the retail and agriculture sectors.

Some estimates of losses from other parties have been much lower but Storm Exchange say this is because the focus has been narrowly placed on farm production when the actual loss potential is much higher when you take all the related industries into consideration.

This doesn’t bode well for the economy with the inflationary pressures it is currently experiencing. The point Storm Exchange make about the impacts not being forecast on the full range of industries affected by the floods is a very valid one. Too often weather risk management programs are narrowly focused and thus do not return the full value they should. This all highlights the importance of good analysis prior to entering into a weather risk program to ensure you have assessed the risks accurately.

The full report can be downloaded from the Storm Exchange website by registering for their white papers.

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