Blog: Chris Brook-CarterWeathering out the weather

Chris Brook-Carter | 17 August 2004

Stuck in my office at lunchtime again today, looking out at yet another day of rain in this appalling summer in Western Europe, I was reading about the devastation wreaked by flash floods in the UK and Hurricane Charlie in the US. Whether rain is confining me to my desk or the wind is blowing the top off someone’s house, these recent freak weather patterns are a stark reminder of the affect the weather has on our lives. 

The sway the weather has on business, however, can be subtler and less easily quantifiable. In terms of damage and destruction to property, devastating events such as Hurricane Charlie have an obvious cost. But what of the wet and dreary summer across Europe?

As we have seen in the last month, drinks companies, such as Carlsberg and Coca- Cola Enterprises, are traditionally among the hardest hit from poor weather during the summer, but they are not alone.

A recent survey published on the UK’s Met Office website, suggested that with its changeable weather, the UK climate is costing firms more than £7.6 billion a year, through late deliveries, surplus or insufficient stock and cancellation of projects. This is also true of many companies across the globe.  In fact, it is believed that over 70% of all companies suffer exposure from weather.

It is a trend that is giving rise to the concept of “weather risk management”. Weather risk is the uncertainty in cash flow and earnings caused by weather volatility. Its management can range from the use of long-term forecasting to adapt your business, to investing in weather derivatives.

Weather derivatives are financial products such as swaps and options that allow companies to protect themselves against weather risk, just as they use financial products to hedge price risks.  

A recent industry survey by PriceWaterhouseCoopers revealed that weather derivatives transactions grew threefold between April 2002 and March 2003.

The drinks industry should take note, because blaming poor performance on bad weather will be given increasingly short shrift by investors as this concept develops. Weak results in times of bad weather will be seen as bad management rather than bad luck.
 
As the Met Office's marketing director, Jonathan Hearth says on its website: “The business community must acknowledge that managing the weather and business success go hand in hand. If this is possible, there can be no excuse for blaming poor business results on the weather.”


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