Weather Risk

Weather Market in India

Weather Risk Management

Services Pvt. Ltd.
Agenda

● Background
● Examples of Weather Insurance in India
● Issues
● Initiatives

Weather Risk
Weather Markets – The Need
● Farmers
● Agriculture credit off-take in ninth plan – Rs. 2,31,798 crores (grew @ 20% pa); Target
for X plan – Rs. 7,36,570 crores
● 90% crop losses on account of weather related risks
● Rural Economy is highly weather dependent
● Limited success of area yield based crop insurance
● Commodity Traders
● Weather related supply bottlenecks make dry-land commodities very volatile
● Intraday volatility of Guar, chilly touches 10-15% (daily trading at national exchanges touches
Rs.1000 crore daily)
● Vegetable and fruit Mandis highly dependent on temperature (Delhi Mandi trade alone
touches Rs.1000 crore annually)
● Trader income dependent on weather vagaries

● Industries like agro-input companies, food processing industry, companies,

plantations, FMCG, Banks, Power sector etc
● Not uncommon to find Agri-Input companies, whose sale dips by over 30-40% due to
fluctuation in rainfall

Weather Risk
Weather Markets – The Need

Weather Risk
Weather Markets – The Need

● EID Parry sales, net down 86 pc on monsoon failure. - The Hindu, Jan
17, 2003
● The Company's business is seasonal in nature and the performance can
be impacted by weather conditions - Notes to Accounts, Syngenta (I) Ltd.
● 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
● The delayed monsoon has hit the fertilizer stocks badly. - Analyst, Hindu
Business Line
● Over 1000 farmers commit suicide in vidarbha and Telangana in last two
years – TOI
● An average drought costs upto Rs 4 bn to the state exchequer,Gujarat
earthquake resulted in direct damages of about Rs.153 billion -NDMC

Weather Risk
Agri Risk Management – Current Scenario

● Crop Insurance
● Delay in Claim Settlement
● High Cost of Risk Transfer, Inefficient allocation of public resources
● Premium to claim – 1:5
● Reserves in the order of Rs.8000-10000 crores required
● Lop-sided claim settlement mechanism with high possibility of subjective
bias
● Less than 2% farmers taking insurance on a voluntary basis
● About 12% of loanee farmers taking insurance
● Doesn’t address the risk management requirements of non-farmers
● To a large extent the risk is weather dependent
● In absence of meaningful risk management product --Agriculture
production is sub-optimized
● Inefficient distribution of agricultural inputs
● Large tracts of land unused/ used for non-commercial crops

Weather Risk
Why Weather Market

● Agricultural loss in many parts of the country is weather

dependent
● Weather Insurance/Derivatives can fill in the gap
● Loss can be monitored real time
● Cost of risk transfer can be reduced through weather trading
● Weather (esp. rainfall) is the common commodity across
diverse agri-products, industries
● Explains up-to large variation in prices for commodities in the dry land
● Entities on both the long and short side

Weather Risk
Why Weather Market

● A diverse set of participants exchanging risks shall reduce

cost of risk transfer
● Volatility is comparable to other commodities such as Gold, agri
-commodities
● Attracts speculators and trading community
● Synergies with Energy Market
● Power deregulation would further strengthen the synergies
● India has the potential to emerge as the largest weather
market
● An Indian Company/Exchange can lead the world market

Weather Risk
Weather Market: Instruments
● Weather Insurance
● Assurance against losses due to a specified weather
event
● Loss compensation based on a pre-agreed formula
● Weather Derivatives
● Option
● Futures
● Bonds
● Bond with payments triggered/calculated on basis of a
weather event

Weather Risk
India is looking for such Instruments

● Financial solutions to go along with technical solutions

● Leveraging inherent diversification and non uniform impact of weather
events
● Informal rainfall markets exist
● Weather Insurance
● Launched in 2003, approved by IRDA

● Weather futures and option trading to be allowed soon

● Commodity futures market reformed in 2000
● Since then an exponential growth in future trading witnessed
● Synergies with power, carbon markets
● Weather bonds being contemplated by Institutions

Weather Risk
 Why Weather Market

Commodity/ Extent of Trading Turnover

● Linkage of the underlying
Index/Scrip linkage with (in $ Trillion)* with economy is important
economy*
Forex $ 7.5 tr of Approx. $1500-1600
● Ensures buyers & Sellers
Derivatives foreign trade trillion
● Base liquidity further deepens
Interest rate $ 20-25 trillion
derivatives of bond the market
Equity
Derivatives
$ 10-15 trillion
of equity
● Weather impacts approx.
portfolio
● GDP of $150 bn in India
Illegal Betting ----------- $ 2.15 trillion (vis-à-
vis, a total annual ● GDP of $ 200-250 bn in India
global savings of $7.5
tr) & China
Weather $ 150 bn (for ? ● GDP of $ 400-450 bn in top 8
Derivatives Indian
economy) developing economies
*The economist 2005, 2006

Weather Risk
 The Eventual Market
Primary Risk amount (in Risk amount (in Rs. Agri- Risk amount (in Rs. Risk amount (in Rs.
Markets Rs. bn) bn) transferred by- Equity/Comm bn) transferred by- bn) transferred by-
transferred by-15 2020 odity Funds 15 2020
Agri-input 50-75 100-125 Agri-Funds --- 400-450
Banks/Comm 25-50 500-600 Commodity 25-30 100-150

Other(s) 25-50 150-200

•Coming together to create a market of approx. S 0.6 tr by 2020

Speculator Capital employed by-15 Capital employed by-

s/Hedge (in Rs bn) 2020 (in Rs. Bn)
Funds
Commodity 5.0 150.0
Capital 25.0 55.0

Weather Risk
 Structure of the market
End Users Intermediaries Primary Secondary Tertiary

Energy
Insurance Insurers Investors
Construction Brokers &
Banks
Banks
Agriculture OTC
Exchange

Retail
Inter-Dealer
Brokers Energy
Transport Reinsurers
Consultants Companies
Food

Weather Risk
Agenda

● Background
● Examples of Weather Insurance in India
● Issues
● Initiatives

Weather Risk
Issues

● No historical precedence
● No active “cash/spot markets”
● No way to quantify impact of weather
● No way to price weather for different locations (any given geographic
longitude-latitude)
● Large distances
● Concept of weather based risk management is new and
“abstract”
● No secondary market to supplement it
● Regulatory Issues
● Financial product penetration in agri-market is shallow

Weather Risk
Issues

● Existing Weather Insurance

● High Basis Risk
● Inadequate Weather Station Coverage
● Inaccurate cover design
● Difficult for the insured to envisage cover benefits
● High Cost of Risk Transfer

Weather Risk
 Basis Risk Impact
Basis Risk
Loanee Farmer

Yes No
Rain at Obsy?

No No
Rain at Farm? Rain at Farm?

Yes Yes
No No
Insured?
Insured?
Normal Yield – Yes
Normal Yield – Yes
Loan Default – No
Yes Yes
Loan Default - No Claim - Yes

Normal Yield – No Normal Yield – No Normal Yield – No

Claim - No Claim - Yes Claim - No
Loan Default - Yes Loan Default - No Loan Default - Yes

Failed Insurance because of basis

risk. Higher the basis risk, higher is
the insurance failure

Weather Risk
Current Weather Risk Management Practice
Unable to reduce cost of risk transfer by diversification in a covariate
environment
Transfer

Forecast
Lesser or no attention to:
-Accurate risk identification
-Inherent risk management possibilities
Monitoring -Proper monitoring for risk minimization
-Inherent basis risk
--Inadequate shorters
Quantification

Identification

Outcome is high cost of risk transfer and failed risk management program

Weather Risk
Agenda

● Background
● Examples of Weather Insurance in India
● Issues
● Initiatives

Weather Risk
 Our Initiatives

● Create the much needed “Cash/spot market”

Real Time Data Decision Support Platform enabling Marketing

availability for any system(s) for major Trading and cost Network/Relatio
given long-lat customer segments reduction nships

● Build active futures/option trading market

Weather Risk
Our Initiatives

● Deepening the Primary market

● Technology development
● Resolving the key constraints
● Developing the secondary market in tandem
● Launching the Indices for key regions
● Approaching the key market segments
● Commodity funds, Agri-funds, Rainfall speculators, International trading
funds
● Push for regulations on participation by Banks and MFIs
● Presence in both the OTC and exchange traded market
● Developing the Hybrid market
● Quantos, Satellite Image – weather indices, Weather-Area yield
● Cat indices

Weather Risk
 Organizing Real Time Data

On Site wireless Sensors ● Covering important

Processing of data received from
sensors and converting it agricultural zones real
according to specific product
time, at a cost of
approx. Rs.500 per
sq.km or Rs.5 per ha

● Generation of Historical
Farmers Console (GIS) records for any given
long.- lat. Position
● Statistical & Neural
Network model

Weather Risk
 computer vision/aerial imaging
 Mosaic generated from images taken from UAV of IITK campus
(Courtsey Aurora Integrated Systems)

aerial image mosaicing

aerial image registration

Weather Risk
Agro based applications of UAV
Hyperspectral Remote Sensing Indices for Crop Status
● Aerial imaging has been identified as the foremost technique to generate agronomy
indices

● EO sensors along with a FLIR sensor provide accurate estimation of crop/vegetation

growth and health

● Addition of hyper-spectral sensors provide information that as of now exists only

through low resolution satellite data

● UAVs flying at various altitudes can provide very high resolution images as compared
to satellite data

● Within-field variability of yield monitor spatial data can be collected during harvest
and correlated with hyperspectral indices related to crop growth and canopy
structure, chlorophyll concentration, and water content.

Weather Risk
 Spatial Interpolation

RMS error ( under

square root
transformation) ~
2mm

Neural network, AI (HMM) models

to improve precision

Weather Risk
 Decision Support Architecture
Plugging out of
risk

Transfer

Forecast

Monitoring

Quantification

Establishing
Existence of Risk
Identification

Weather Risk
 Calculating Stage-wise Water Imbalance
Water Surplus / (Deficit)

Water Availability Water Requirement

 Depends on:  Depends on:

 Total Rainfall  Crop Physiology
 Soil Conditions  Max & Min
Temperature
 Sunshine Hours
 Relative Humidity

 Soil Condition is specific to a given area

 Water imbalance at each stage has different impact on yield
 Water imbalance can be scientifically modeled
 Different model required for each crop & location

Weather Risk
Water Imbalance – Yield Impact

Weather Risk
 Phase-wise Impact of Weather Risk
E.g. of Paddy Crop
Normal phase wise
103.5 218.3 143.7 94.7 96.6
water requirement(mm)
Weekly Rainfall(mm) total 41 62 109 188 237 263 255 269 227 238 224 186 160 150 145 91 82 60 60 56 56 56 42 34 27 26

normal Max. temp. 0 C 32.2 32.0 31.1 30.6 30.0 29.5 29.3 28.5 28.8 28.9 28.3 28.2 28.8 28.3 28.6 28.6 29.1 29.3 28.9 29.3 29.9 30.2 30.8 30.8 31.1 31.1

weather Min. temp. 0 C 25.2 25.3 24.6 24.2 24.1 23.8 23.9 23.1 22.9 23.3 23.2 23.0 23.4 23.0 23.0 23.0 23.0 22.9 22.9 22.9 22.9 23.4 23.6 23.4 23.4 23.0

Sunshine hours 8.4 8.0 7.5 8.8 7.5 8.2 7.2 8.0 7.3 6.7 7.2 9.0 8.5 8.0 8.8 9.0 7.5 8.0 8.2 7.7 7.0 6.8 7.7 6.4 7.8 7.9
Humidity 0.80 0.85 0.85 0.85 0.85 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.85 0.85 0.85 0.80 0.80 0.80 0.80 0.80 0.80 0.75 0.75 0.75 0.75

HARVESTING
1.2
GRAIN FORMATION

Life history
and FLOWERING
mean dates of
important epochs
of crop growth VEGETATIVE GROWTH

0.4
TRANSPLANTING

0.2
SOWING

Standard weeks 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45
Months MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER

Yield Response Factor to water imbalance. Higher

response factor means higher impact on yield due to
water imbalance
Weather Risk
 Modeling Pest & Extreme Weather Risks

● Identifying yield losses on account pest and disease

accelerating weather conditions
● For e.g. rainy conditions with conducive temperature & humidity cause
extreme elongation of downy mildew in Grapes
● Preparing catastrophe risk models to identify and evaluate
losses on account of extreme weather conditions
● E.g.Thunderstorm and Flood modeling
● Economic models for other participants in the agricultural
chain
● Take into account other factors such as logistics, existing risk
management mechanisms

Weather Risk
 Decision Support System

Forecast
Inputs

Front-end Output

Identification & Scientific Simplified -Crop Planning

modeling of output in -Irrigation planning
Quantification risk vernacular
of the Risk language for
-Pest Management
farmers -Yield forecast
-Risk Transfer

Current
Weather
Data

Needs to be customized for Bank’s portfolio

Weather Risk
 At Village Service Point

Analysis of impact
Special package for
Rainwater harvesting
project
Optimal crop planning
based on weather and
phenological models for all
long-lat points in the
region
To be transferred to
Weather farmers and
Forecasts for a agricultural traders
location based on through extension
models services, banks
Optimal loan and insurance
design for all long-lat points
in a particular region

Weather Risk
Weather Risk
Weather Risk
Trading Platform
● Trading possible
on any given
long-lat
● Guided by DSS
Futures ● Embedded
Exchange Allocation
algorithm
● Supported by
market making

SW
funds

AP
● Available for both
OTC, traded
futures & options
Favorable/ adverse
weather conditions

Purchase of agriculture Inputs Futures

Exchange
Substitution,
Loss of Profit, competitive
opportunity comparison,
availability of
Company’s ability to supply the inputs at the right
banking loan
time, right price, right place

Weather Risk
 Facilitating Linkages Premium reduction Distribution Outreach
possibilities due to
Trading Market hedging in trading
market
Agri-trader /
Speculator

Exchange traded Village level

Banks Weather Futures Trading options/Insurance service points

Trading Fund Input providers to be

roped in to share
premiums

● The network to be established across dry-land regions of the country

● Prominent FII trading funds (re-insurers being roped in)
● Exploring geographical diversification
● Targeting/identifying the sellers in the weather market
● Link with the trading market
● Explore the OTC market

Weather Risk
Developing the Hybrid Market

Hybrid – Area
Hybrid – Area
yield -weather
yield -weather

Quantos, hybrid –
weather – rainfall, Quantos, hybrid –
weather – rainfall, Weather-satellite
temp, Weather-satellite
temp,humidity,
humidity, images
images

Weather Risk
 Our Role
End Users Intermediaries Primary Secondary Tertiary

Energy
Insurance Insurers Investors
Construction Brokers &
Banks
Banks
Agriculture OTC
Exchange

Retail
Inter-Dealer
Brokers Energy
Transport Reinsurers
Consultants Companies
Food

Weather Risk
Technology Service
Provider
Thank you

Weather Risk