Forget slashing interest rates or bailing out banks, brokers and homeowners; if the Fed and the Treasury really wanted to help the economy, they’d hedge the weather. As would pretty much every other major economy – except Japan.
Or, as WeatherBill put it in a just-released 43-page paper titled, “Global Weather Sensitivity: A Comparative Study”:
Results show that countries with extreme temperature variations and high levels of mining and agricultural output are the most sensitive to the weather. Brazil is found to be the most weather sensitive country and Pakistan the least. The US is found to have the largest total weather sensitivity, estimated at $2.5 trillion, or 23 percent of the national economy. Estimates suggest that world output could grow by as much as $258 billion per year if these [sixty-eight] countries were to hedge their weather risk, roughly estimated to be $5.8 trillion.
WeatherBill is a San Francisco-based start up that allows qualified clients (read: QIBs and accredited investors) to hedge their weather exposure using derivatives.
The company is run by a host of ex-Googlers, and is backed by Nephila Capital, a hedge fund that specialises in weather risk.
“It would cost a whole lot more down the road to deal with the aftermath of weather-related catastrophes than if countries bought the coverage and protected themselves today,” WeatherBill’s chief executive, David Friedberg, said.
The study ranked sixty-eight countries according to their relative “weather sensitivity”, de?ned as the relative potential e?ect of weather on a country’s economy.
Brazil, with a sensitivity score of 15.73, is the most weather sensitive economy, while Pakistan’s score of about 0.58 shows it to be the least. According to WeatherBill:
This means that a dollar in Brazil should be approximately 30 times more weather sensitive than a dollar in Pakistan; a dollar in Pakistan should be slightly less than two-thirds as weather sensitive as a dollar in the United States, with a weather sensitivity score of 0.85.
The study also measures the total weather sensitivity of each of the assessed countries.
The US has the largest total weather sensitivity – $2.5 trillion – but a small relative score; Bolivia, which has the lowest total weather sensitivity at around $2bn, ranks 20th in relative weather sensitivity.
But who stands to benefit the most from playing the weather? The study posits that in absolute terms, the US, China and Russia are likely to grow the most, and New Zealand, Switzerland and Finland the least.
In percentage terms, Kuwait, Azerbaijan, and Saudi Arabia are expected to grow the most, and
Italy, Germany, and Switzerland, the least.
If all sixty-eight countries mentioned in the study hedged their weather risk, WeatherBill expects additional growth – net of the costs of the hedges – of $258bn, or roughly 1 per cent of their cumulative output.
This number is based on the assumption that each of the sixty-eight countries hedge all of their capital at risk for each sector, and reinvest in that sector at historical growth rates. Consequently,
Hedging weather risk will likely allow investors to divert resources into sectors and industries with greater risk, and therefore greater growth opportunities.
In countries where ?nancial markets are weak, the introduction of weather risk management products might help the development of local credit channels, which could signi?cantly boost economic growth.
But Japan need not bother. According to WeatherBill – it is only country for which it would not be bene?cial to hedge its weather risk.
Related links:
Research Reports from WeatherBill