Business Situation

Freezing conditions were reported to have caused more than $600 million in damage to the U.S. citrus crop in a single week of December 1998, with $300 million occurring in Tulare County, California, alone. These risks could have been easily managed with a GuaranteedWeather® option.

Solution

The chart above compares the daily low temperature of one specific year to that of the previous 10 years. It can be derived from this data that cold snaps occur at certain times fairly often. You as a grower can hedge the risk of such cold periods by buying a GuaranteedWeather® option that pays out for any series of days that the temperature drops below a set temperature.

Another possibility would be for the grower to SELL an option. The grower receives a flat premium payment. If there are less than a certain number of freezing days in December, the grower pays out to the buyer of the premium. If conditions are normal or there are more freezing days, the grower simply keeps the premium. Conceptually, the grower is selling a weather derivative to protect the counterparty from conditions that are too warm. A company selling heating oil or gas might want to buy this option from the grower.