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

pro

du

cti

on

-3000

-2000

-1000

0

1000

2000

3000

Fu

ncti

on

(rain

fall

*tem

p)

70000

75000

80000

85000

90000

95000

100000

Production

year

pro

du

cti

on

-10000000

-5000000

0

5000000

10000000

15000000

20000000

Fu

ncti

on

of

rain

*tem

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 obligationo In plantations/ corporate Farming Fixed : Variable cost

ratio is higho 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

60mm160mm

100mmRainfall 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

acre

age

(lha)

0

500

1000

1500

2000

last

yea

rs a

v pr

ice(

Rs)

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 InventoryLoss 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 A WEATHER INDEX IS GENERALLY CONSTRUCTED AS A FUNCTION OF FREQUENCY OF OCCURRENCE OF FREQUENCY OF OCCURRENCE ANDAND MAGNITUDE OF EVENT MAGNITUDE OF EVENT

PRICEPRICE VOLUMEVOLUME REVENUEREVENUExx ==

PRICE RISK PRICE RISK MANAGEMENTMANAGEMENT

WEATHER RISK WEATHER RISK MANAGEMENTMANAGEMENT

LOWER LOWER EARNINGS EARNINGS

VOLATILITYVOLATILITY++

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 lacsWithout Weather Insurance

Sales in an area 160 lacsPotential profit in an area 50 lacs Lower profits due to lack of scaleRisk Capital Employed due to Non Weather Risks 160 lacs Assumed @ Rs 1 per unit of salesRisk Capital employed due to weather 96 lacs Assumed @ Rs. 0.6 per unit of salesReturn 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 scaleWeather Insurance Premium 12 @ 8% of Risk Capital due to weatherProfit after Insurance 113Risk Capital Employed due to Non Weather Risks 250 Assumed @ Rs 1 per unit of salesRisk Capital employed due to weather 0Return 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 Bank’s 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 monsoonDeficit>10%

Normal monsoon(-ve)

Normal monsoon (+ve)

Excess monsoonexcess>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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