All the planning in the world cannot help you sell more gallons when Mother Nature does not cooperate. When winters are warm, temperatures are what affect your sales. NOT planning, pricing, service or marketing efforts. There is a way, however, to generate revenue during a warm winter… Hedging the volume through “option purchases” on the number of heating degree days (HDDs) in your area.
There is an aphorism in the academic world that says, “publish or perish” in reference to advancing a career. Our aphorism is Hedge or Perish.
Basis Risks are Here to Stay... For the past 30 years companies have been offering pricing programs (fixed and capped), to give their customers peace-of-mind, maximize company sales margins, and minimize customer attrition.
Weather hedging (for fuel dealers) can best be described as a method to recoup some level of the lost fuel delivery and service profitability that otherwise would have been earned in a warmer than normal winter. They are financial derivative tools designed to counter that hackneyed refrain of helplessness we so often hear: “Hey, we can’t control the weather.”
As retail prices increase, customers who are on pricing programs are shielded from price spikes. Sure, it costs money to be on a cap program, and you might have to be on a budget plan AND have a service contract. But the savings… Caps are intended to protect customers from price increases and allow them to benefit if prices fall. It does come with a cost (the costs to hedge the cap), but those costs are an investment that can yield fantastic results! Dealers who offer caps and hedge them (properly) meet their profit goals and earn a good...
