Weather hedges at the ready; here comes a cold snap

It’s that time of year when companies who have exposures due to colder weather are watching the long range weather forecasts and deciding whether or not to hedge their weather risks this year. We’re hearing that there has been increased interest in cold weather hedging this year after the extremes experienced in some parts of the world in winter 2009/10.

In the UK, the first forecasts of freezing weather and possible snow have been announced for the end of this week. Last winter the UK suffered an extreme period of cold and ice and many companies lost considerable amounts of money due to not being to operate fully while snow and ice was on the ground. We hear that this has lead companies to seek alternative methods to hedge these risks with heightened interest in cold weather insurance policies and weather derivatives products. Other companies have taken to hedging their risks more practically by purchasing their own supplies of sand and grit to enable their vehicles to keep moving should the snow come.

In the U.S. cold weather has been forecast for the end of this week also. Colder than normal weather is forecast for much of the eastern U.S. from the 24th to the 28th November with temperatures as much as 8 degrees below the norm. This has caused a spike in natural gas futures on the NYMEX and is sure to have increased enquiries for weather hedging services.

The question of ‘weather to hedge’ is still asked by companies every year. The weather risk management industry should seek to change that question through increased education and PR to ‘when/how much do we hedge’. The industry needs to educate potential customers that weather hedges need to be planned and in place in advance of forecasts of weather extremes. Yes, it is possible to hedge at short notice, but as with everything the costs are greater.