Weather Market in India

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Weather Market in India

• Weather Risk Management Services Pvt. Ltd.

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Agenda

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

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Weather Markets The Need

• Farmers
• Agriculture credit off-take in ninth plan Rs.
  2,31,798 crores (grew _at_ 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

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Weather Markets The Need
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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

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Agri Risk Management Current Scenario

• Crop Insurance
• Delay in Claim Settlement
• High Cost of Risk Transfer, Inefficient
  allocation of public resources
• Premium to claim 15
• 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
• Doesnt 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

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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

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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

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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

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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

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Why Weather Market

• Linkage of the underlying with economy is
  important
• Ensures buyers Sellers
• Base liquidity further deepens the market
• Weather impacts approx.
• GDP of 150 bn in India
• GDP of 200-250 bn in India China
• GDP of 400-450 bn in top 8 developing economies

The economist 2005, 2006
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The Eventual Market

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

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Structure of the market
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Agenda

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

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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

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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

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

• Lesser or no attention to
• Accurate risk identification
• Inherent risk management possibilities
• Proper monitoring for risk minimization
• Inherent basis risk
• -Inadequate shorters

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

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

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Our Initiatives

• Create the much needed Cash/spot market

Real Time Data availability for any given
long-lat
Decision Support system(s) for major customer
segments
Platform enabling Trading and cost reduction
Marketing Network/Relationships

• Build active futures/option trading market

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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

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Organizing Real Time Data

• Covering important agricultural zones real time,
  at a cost of approx. Rs.500 per sq.km or Rs.5 per
  ha
• Generation of Historical records for any given
  long.- lat. Position
• Statistical Neural Network model

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computer vision/aerial imaging

• Mosaic generated from images taken from UAV of
  IITK campus (Courtsey Aurora Integrated Systems)

aerial image mosaicing
aerial image registration
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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.

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Spatial Interpolation
RMS error ( under square root transformation)
2mm
Neural network, AI (HMM) models to improve
precision
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Decision Support Architecture
Plugging out of risk
Transfer
Forecast
Monitoring
Quantification
Establishing Existence of Risk
Identification
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Calculating Stage-wise Water Imbalance
Water Surplus / (Deficit)
Water Requirement
Water Availability

• Depends on
• Total Rainfall
• Soil Conditions

• Depends on
• Crop Physiology
• 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

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Water Imbalance Yield Impact
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Phase-wise Impact of Weather RiskE.g. of Paddy
Crop
1.2
0.4
0.2
Yield Response Factor to water imbalance. Higher
response factor means higher impact on yield due
to water imbalance
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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

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Decision Support System
Forecast Inputs

• Crop Planning
• Irrigation planning
• Pest Management
• Yield forecast
• Risk Transfer

Front-end Output
Identification Quantification of the Risk
Scientific modeling of risk
Simplified output in vernacular language for
farmers
Current Weather Data
Needs to be customized for Banks portfolio
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At Village Service Point
Special package for Rainwater harvesting
project
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Trading Platform

• Trading possible on any given long-lat
• Guided by DSS
• Embedded Allocation algorithm
• Supported by market making funds
• Available for both OTC, traded futures options

SWAP
Futures Exchange
Futures Exchange
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Facilitating Linkages
Premium reduction possibilities due to hedging in
trading market
Distribution Outreach
Trading Market
Agri-trader / Speculator
Banks
Weather Futures Trading
Exchange traded options/Insurance
Village level 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

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Developing the Hybrid Market
Hybrid Area yield -weather
Quantos, hybrid Weather-satellite images
weather rainfall, temp, humidity,
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Our Role
Technology Service Provider
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Thank you