Snowfall has certainly been a feature of the northern hemispheres winter months this year. The UK suffered much colder temperatures than normal and snowfall which remained on the ground for many days causing much disruption to transport, travel and businesses. The U.S. has suffered huge snowfalls in the northeast which again caused major disruption and loss of revenue to businesses. On another continent China has had much heavier snowfall than normal in the northern provinces. Total losses to businesses, economies and industries? Unknown, and unlikely to be properly tallied. Snowfall disruption has major knock-on effects to businesses whose staff fail to arrive at work as well as financial effects on businesses who cannot function due to snow. So snowfall derivatives are surely a good thing?
Well the Chicago Mercantile Exchange is certainly bullish on the prospects for this their latest precipitation derivative product as evidenced in this article on Medill Reports. Launched in five U.S. cities in December the derivatives have traded slowly so far but the CME say that isn’t unusual and they expect much brisker trading throughout this year.
And it’s not just for companies looking to hedge the risks associated with too much snow, the derivatives can also be used by companies who rely on snow and want to hedge against the risk of their being too little for their business to function.
Insurance against snow (or lack of it) has been available for years (although not widely used). Being able to openly trade financial products and transfer your snowfall risks to others could be huge so we think the CME has every right to be bullish. The snowfall experienced this winter should help to raise the profile of these new products and we expect to see a CME marketing push to help drive the volume being traded.
Find all the CME information on snowfall products here.