HAMBURG (dpa) – Rolf Bannehr of the northern German town of Dahlenburg is hoping for a really hot summer. He operates a small electric power station, and the more farmers need to pump water to irrigate their fields, the more he earns.
But on the other hand, even a long rainy season won’t hurt his business. This is because Bannehr has insured himself by buying so-called weather derivatives against the whims of the weather fronts.
After a certain agreed-on amount of precipitation, the weather derivative insurance will then pick up most of the revenues which would have been washed away by the rain.
Weather is becoming a good. In the past five years, weather derivatives have been a lucrative business in the United States, where the seasonal fluctuations are much more pronounced than in the moderate weather zone of Europe. Now, clever businessmen in Germany are keeping their eye on the weather.
Weather derivatives are contracts comparable to insurance. Among others, a travel tour operator which sells vacation trips to a sunny destination, pays a premium to a bank. This institute then is obliged to pay compensation back if the summer turns out to be a wet one.
In contrast to an insurance policy, which defines the risk to be covered, a weather derivative is more like placing a wager: at the agreed-on date, the weather data – volume of rainfall or total number of hours of sunshine – can determine compensation or loss.
According to the Berlin energy utility giant Bewag, up to 30 per cent of the country’s total gross domestic product is more or less dependent on the imponderabilities of the weather.
Ice cream parlours and beer gardens only draw people when the sun shines. Gas works want cold winters. Frost in April can ruin the wheat harvest. The mercury in the thermometre can dictate profits or losses the same way clouds can darken a company’s business report.
Bewag as a result wants to insure its partners with weather derivatives in the future, though the project is still in its infancy.
“The market for weather derivatives is very, very new. But it is quickly growing,” says Bewag analyst Markus Hartwig, noting that his own company last winter insured two of its heating power stations against mild temperatures with the French bank Societe Generale.
At the Nordic Powerhouse company in Hamburg, managing director Klause Scheele is not at all certain that weather deals really pay off.
“Here in Europe we don’t have such really extreme temperature fluctuations like in the United States, where the business is flourishing,” he said.
Nordic Powerhouse is now studying weather derivative deals very closely, but the company, which is 50 per cent-owned by the Hamburg electricity company HEW, does not regard itself as being a “first mover” on the market, Scheele said.
In the United States, the dealing in sunshine and rain, and above all with heat and extreme cold, is done down on the trading floor, where the partners meet.
Now Deutsche Boerse, operator of the Frankfurt Stock Exchange, is thinking of introducing weather derivative trading. But no definite start-up date has been set.
“We are still studying the customers’ needs,” said Frank Hartmann of Deutsche Boerse, who notes that those interested in the idea can currently surf the Internet for the meteorological data of 30 European cities.
Like all the other speculative stocks, weather derivatives might also prove to be a strong lure for gamblers. Some critics ask whether the business really is risk management or simple gambling?
But Hans Esser, whose consulting company Finanztrainer.com brokered the weather derivative deal for the Dahlenburg electric power company, dismisses such suggestions.
“This is an absolutely serious business,” he said. Many people talked about weather derivatives but very few really understood how they function. Esser, who regards himself as a pioneer in the young market, also complains that “many companies simply do not want at all to understand this product”.
