As you all know, weather can dictate how profitable your company will be during the season. Some of you may already be familiar with weather hedging programs and may even have implemented them into your company’s strategy. While we still see many companies with misconceptions about weather hedging, the main source of this misunderstanding stems from a lack of knowledge about weather hedging programs. The information below will help you understand weather hedging and how easy it is to implement:
What is a weather hedge?
A weather hedge (commonly known as a weather derivative) is “a financial instrument used by companies or individuals to hedge against the risk of weather-related loss.” (source: Investopedia). Essentially this helps your company recover when winter may not show up by providing you with a financial payout for gallons you haven’t sold
How does it work?
Based upon Heating Degree Days (HDD’s), you decide which months you would like to cover, at what level of HDDs you want to start receiving a settlement and the gallons you expect to sell or gross profit you expect to earn in each month. Your trading partner will then provide a quote for a structure to hedge the risk. You pay a fee (the “premium”) for participating in this program (similar to paying your premium for health insurance) so that when the temperatures are higher than expected, you will get a payoff for the resulting unsold gallons.
While you can set up weather hedges on your own, it’s best to consult with a commodity trading advisor as they can help explore various program options that work best for you and your company. Weather and profits have a significant correlation, so don’t let the weather dictate your profits. Contact one of our hedging advisors today to get started
Angus Partners, LLC d/b/a Angus Energy is a member of the National Futures Association and a registered Commodity Trading Advisor.
Disclaimer: PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and may be liable for amounts well above your initial investment.