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Managing Weather Risk In Seed Business

1645 words - 7 pages

Managing Weather Risk in Seed Business Weather Risks of a Seed Company Weather risk for a seed company is the risk of drop in sales volume on account of adverse weather conditions like excess / deficit in rainfall, extreme temperature and humidity conditions etc. Indian agriculture is predominantly dependent upon monsoon rains, with more than 60% of cultivated area in Kharif being rainfed. This rainfed nature of Indian agriculture makes the business of agri-input company completely dependent upon weather. Very often seed companies find themselves holding large unsold stock because of adverse weather conditions like insufficient or untimely rainfall. Seed companies also find it difficult to ...view middle of the document...

Weather Risk – Basis and Response Most of the agri-input companies have not developed adequate tools to identify, evaluate, monitor and manage the weather risks in their businesses. These companies have very ad hoc weather risk identification and response mechanism which is based on experienced of field-level staff. This guess estimation process delays the information flow to the top management inhibiting any corrective logistical measures central management team could have taken to minimize and avoid losses. Table below shows the response mechanism generally adopted by companies for weather risks of varying magnitude. The table also suggests solutions / changes in existing response mechanism in form a more scientific approach towards management of weather risks.
Particulars Low Risk Event • Very Localized Event • Impacts one or two districts • Diffcult to predict • Minor logistical changes involving movement of goods to nearby districts having sustained demand • Guess-estimates and post happening of events • Delayed response because of nonavailability of data and vague understanding of weather impact • Not Significant Moderate Risk Event • Wider Geographical Spread covering agroclimatic zone or state Can be predicted • Requires more intense planning involving moving goods from weather hit locations to states with sustained demand. • Guess-estimates and post happening of events • Delayed response because of nonavailability of data and vague understanding of weather impact • May result in sales losses at aggregate level • More accurate understanding of impact of weather. • Flexible alternative plan which responds to current and forecasted weather • May result in sales losses at aggregate level High Risk Event • Multi-state event with high severity and impact. Like 2002 drought • Pushing sales at irrigated regions or in next season


General Response Basis of response

The Problem Financial Impact

• Guess-estimates and post happening of events • Any response won't work, since the weather event is clamitic and wide spread • May result in Net Loss / depletion in shareholders' weather • Risk transfer at a cost that is lower than the cost of assuming the risk. • Buying Weather Insurance / Options • May result in Net Loss / depletion in shareholders' weather

Solution Financial Impact

Managing Weather Risks Process of managing the volumetric risks related to weather starts with identification of the risks and culminates with transferring the risk which seed company deems costly keep in its own books. The process is outlined below:

a. Identification of the Risk: This involves obtaining the fortnightly or monthly sales data of the company for each of the locations for last several years. The data pertaining to crop, soil type of each location / region, general weather condition is also obtained and analyzed. Scientific models are then built, based on correlation of individual and aggregate impact of each weather parameter on...

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