Weather Intelligence And Consultancy

NCML – Crop, Weather & Price Intelligence Group (CWIG) is a division , offering weather data from a chosen geographic locations. This provides a competitive advantage for pro-actively plan one’s business well in advance. The near real-time weather and price data help farmers, agriculture insurance companies, trading professionals and other stakeholders. The single point access to weather data helps to mitigate risk and have an edge in the market.

Crop & Weather Intelligence:

Price Intelligence

NCML-CWIG provides market pricing information for important commodities from various National markets with the participation of around 300 leading participants. This data is used to monitor daily price variation, which is useful for commodity market and commodity lending banks.

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Crop Intelligence

NCML provides information about crop health and development with focus on:

• Remote sensing technology provides information about crop health, by regularly monitoring crops to Agricultural producers (Farmers)
• Commodity Traders and the Food Industry receive more detailed and timely information on crop development and yield predictions.
• We offer tools and services for an effective geographical modeling of agriculture insurance risks. We also offer our services in monitoring Crop Cutting Experiments(CWC) conducted by various agencies
• Crop maps provided by us determine accurately what farmers have planted and also the stress conditions experienced by the crops help in determining the premiums and risk profiles.
• We support the loss adjustment process by providing quick and reliable information about damaged areas.

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Weather Intelligence

NCML-CWIG is the country’s largest private weather data provider headquartered in Hyderabad. It is the pioneer national level weather content maker with presence in 15 states, including Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttarakhand. We offer a full range of weather content (viz., temperature (minimum, maximum and average), rainfall (amount and intensity), dew point, wind direction, wind speed (hourly average and high speed), relative humidity, atmospheric pressure, heat degree-day, cool degree-day, heat index etc.) with our “network of automatic weather stations” spread across the country.

NCML-CWIG differentiates itself from other weather companies by utilizing all latest available technologies, using state of the art equipment with NIST/IMD Traceability, and following WMO/IMD guidelines, to provide better and accurate services to help our clients to take direct actions to mitigate their potential weather risk. As a full weather service group,it offers services to various industries such as agriculture, energy and disaster mitigation for corporate and government agencies that are subjected to weather risks. By taking advantage of our countrywide presence, we provide the highest quality services and support them in the most cost-effective manner.

Our commitment is to perform a variety of weather services to meet the varying needs of all stakeholders in the market and offering better services for each and every one of them is our goal.

Weather Information Management System (WIMS)

One critical issue with all weather data is quality and reliability. Hence we have developed an extensive set of algorithms and procedures for processing the data to ensure better quality and reliability for various weather applications. Key attributes of “Weather Information Management System (WIMS)” are discussed below.

Weather Data

Correct and accurate weather data is the lifeblood of the weather market.  For structuring and pricing weather insurance products or weather derivatives and for tracking positions during a season, traders, end-users and portfolio risk managers require
a) weather observations, typically for at least past 30 years and,
b) daily observations of current weather available at near real time. WIMS provide this full range of current weather data for a series of primary weather stations in almost in all states. CWIG can also provide data for clients who have specific data requirements.

Daily Data

The “real-time” data published by India Meteorological Department (IMD) regularly includes missing or erroneous values due to various reasons (viz., instrument errors, communication system failures, or other glitches) in the process of measuring, transmitting and recording weather conditions. Such values are almost always identified and corrected before publication of the final, official climate records anywhere from a week to several months later, however they pose a problem for data usage that depend on accurate and timely information. Incorrect data for recent periods can result in incorrect valuations of current positions, leading to erroneous insurance settlement or trading decisions.

To provide the market with more reliable data, we conduct overnight data validation process for prior-day data feeds from individual meteorological stations across the country. All data is run through a series of algorithms to detect missing or erroneous values, and experienced meteorologists verify and estimate a replacement value when a problematic observation is detected. Cleaned data is loaded into CITRIX server and delivered to clients on regular basis. This process of data validation and the series of algorithms are derived out the standard data validation rules/instructions laid out by WMO and IMD.

Historical Data

The historical weather data over several decades are available, however, such data often is not suitable to underwrite an insurance product or the weather trading purposes in its raw form. To provide weather market participants with a more reliable basis for pricing and risk management, CWIG provide services on historical data recorded from individual locations.

Cleaned Data

Occasional missing values are common in most historical records, and CWIG also analyze the records to detect any erroneous data, such as minimum values that are greater than maximum or precipitation when there is no change in relative humidity, etc. All missing or erroneous values are replaced with simulated values or estimated values derived from comparisons with neighbouring station recordings, analyses of local micro-climate biases and satellite cloud pictures. The final cleaned data provides a continuous and complete historical time series of daily values.

Enhanced Data

Enhanced data is a version of daily historical values that has been adjusted to be consistent with how temperatures are being recorded by the current instrumentation at each individual weather station. Periodic changes in weather station location, instrumentation or environment over time have introduced measurement discontinuities – permanent increases or decreases in temperature observations – in the historical records for many stations. The existence of such discontinuities in historical data can make the data unreliable for underwriting insurance product or valuing weather derivatives that will be settled based on observations taken with current instrumentation.

Over the years, CWIG has developed and continued to refine a complex methodology for identifying and quantifying discontinuities in historical data. This data enhancement methodology involves an extensive series of statistical tests that compare historical temperature recordings at a particular weather station to recordings at a series of highly-correlated neighbouring stations. Manual analyses and checks of the data by meteorologists serve as a final step to confirm the existence and magnitude of discontinuities in historical data.

Data format and availability

WIMS users have access to a broad array of weather data necessary for analyzing and tracking risk, including databases of cleaned weather data and automatic feeds of daily cleaned data for hundreds of weather stations countrywide in their desired format.

Highly Secure

Security of client data has been treated as an issue of utmost priority in the design of the application. CWIG operates in an environment that provides extremely high physical security as well as high speed and reliable internet connectivity. The system itself incorporates features such as multiple firewalls and encryption of data transmissions to maximize security in all dimensions.

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Our Weather Stations

State	Districts covered	No. of AWS
ANDHRA PRADESH	1	1
ASSAM	7	55
BIHAR	15	181
CHHATTISGARH	2	8
HARYANA	3	3
HIMACHAL PRADESH	12	74
JHARKAND	24	203
KARNATAKA	3	33
KERALA	3	40
MADHYA PRADESH	28	282
MAHARASTRA	28	834
ODISHA	4	5
RAJASTHAN	32	1329
TAMILNADU	7	13
UTTAR PRADESH	6	134
UTTARAKHAND	9	41
Grand Total	184	3236

 

Our Team

CWIG has been active in the weather risk market since 2005 and has a dedicated team focused on the development of overall weather risk management business. Located in New Delhi, Mumbai, Hyderabad and across various state capitals the team includes approximately 80 professionals with expertise in agriculture, meteorology, climatology, remote sensing, GIS, software development, electronics and instrumentation.

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Anatomy of a Weather Index / Weather Derivative

Structure of index insurance contracts (taken from Weather index insurance for coping with risks in agricultural production by Ulrich Hess)

The terminology used to describe features of index insurance contracts resembles that used for futures and options contracts rather than for other insurance contracts. Rather than referring to the point at which payments begin as a trigger, for example, index contracts typically refer to it as a strike. They also pay in increments called ticks. Consider a contract being written to protect against deficient cumulative rainfall during a cropping season. The writer of the contract may choose to make a fixed payment for every one millimeter of rainfall below the strike. If an individual purchases a contract where the strike is one hundred millimeters of rain and the limit is fifty millimeters, the amount of payment for each tick would be a function of how much liability is purchased. There are fifty ticks between the one hundred millimeter strike and fifty millimeter limit. Thus, if $50,000 of liability were purchased, the payment for each one millimeter below one hundred millimeters would be equal to $50,000/(100 – 50), or $1,000. Once the tick and the payment for each tick are known, the indemnity payments are easy to calculate. A realized rainfall of ninety millimeters, for example, results in ten payment ticks of $1,000 each, for an indemnity payment of $10,000. The figure below maps the payout structure for a hypothetical $50,000 rainfall contract with a strike of one hundred millimeters and a limit of fifty millimeters.

How Weather-Based Index Based Insurance Works (taken from Risk Management: Pricing, Insurance, Guarantee. The Use of Price and Weather Risk Management Instruments presented by Erin Bryla)

Risk management products based on weather events avoid the problems of traditional crop insurance because they rely on objective observations of specific weather events that are outside the control of either farmers or insurance companies. They are also less costly to administer because they do not require individual contracts and on-field inspections and loss adjustments. Although these are often called weather-based index insurance products, they are strictly risk management tools rather than traditional insurance.

Weather-based index insurance compares a measurable, objective, correlated risk (e.g. rainfall, temperature, wind speed etc.) to yields. In the case of rainfall as the correlated risk, historical data gathered from regional weather stations is used to determine the mean rainfall for a given period in the farmer’s area. Once the appropriate period has been selected, the issue becomes structuring the rainfall index.

A weather (rainfall) “index” should be carefully designed to weight the more important periods for rainfall in the crop cycle more heavily and than those periods where rainfall is not as important to production. Precipitation in different stages contributes in different measures to plant growth and an excess of rain may be of no use for production. Hence, it is useful to develop a weighting system that allows to differentiate the importance of rainfall in different growth periods and to shape the model so as to take into account the fact that excess rain may be wasted without contributing to plant growth. The final value of the index (the value which, when compared with the threshold, indicates if the insured should be granted an indemnity or not) is calculated by summing the values obtained by multiplying rainfall levels in each period by the specific weight assigned to the period.

Once a sufficient degree of correlation is established between rainfall and yield, and the index has been weighted properly an agricultural producer can hedge his production risk by purchasing a contract that pays in the case rainfall falls below a certain threshold. Farmers can elect coverage for a given period taking into consideration the crop cycle and the marketing cycle. Using this historical index the program is designed, where the option premium is the cost of the coverage and the strike is the rainfall threshold below which indemnity is triggered. The insurance is set up on a proportional basis allowing farmers to choose their rainfall trigger level or threshold.

Customers participating receive a payment if the rainfall index level falls below the threshold. The higher the threshold set for the contract the better the coverage provided the trade off being the higher the threshold the higher the cost of the coverage. In essence a farmer can elect a lower trigger amount of rainfall in order to lower his premium or he can elect a much higher trigger that will give him greater protection but will cost more in premium. Customers can also elect the comprehension of their insurance so they can partially or fully insure their revenue.

Their payment from the insurance is ultimately determined by the combination of these two factors – the rainfall threshold that they wish to be their trigger and the comprehensiveness of the coverage they want. Payment is equivalent to the percentage of rainfall-index shortage multiplied by the level of coverage selected. In the case where rainfall does not fall below the trigger no payment is made to the farmer and the premium is not returned.

Anatomy of Weather Derivatives

Basic concept (taken from Weather Derivatives and Weather Insurance: Concept, Application, and Analysis by Lixin Zeng)

A weather derivative is a contract between two parties that stipulates how payment will be exchanged between the parties depending on certain meteorological conditions during the contract period. There are three commonly used forms of weather derivatives: call, put, and swap.

A call contract involves a buyer and a seller. They first agree on a contract period and a weather index that serves as the basis of the contract (denoted W). For example, W can be the total precipitation during the contract period. At the beginning of the contract, the seller receives a premium from the buyer. In return, at the end of the contract, if W is greater than a pre-negotiated threshold S, the seller will pay the buyer an amount equal to P = k(W – S), where k is a pre-agreed-upon constant factor that determines the amount of payment per unit of weather index. The threshold S and factor k are known as the “strike” and “tick” of the contract, respectively. The payment can sometimes be structured as “binary”: a fixed amount P0 will be paid if W is greater than S or no payment will be made otherwise.

A put is the same as a call except that the seller pays the buyers when W is less than S. The payment, P, is equal to k(S – W) or P0 for a linear or binary payment scheme, respectively. The payment diagrams for a linear call and put contract are illustrated in the figure given below. A call or put is essentially equivalent to an insurance policy: the buyer pays a premium and, in return, receives a commitment of compensation if a predefined condition is met. A swap contract between parties A and B requires no up-front premium and, at the conclusion of the contract, party A makes a payment in the amount of P = k(W – S) to B. In the case of a negative P, the payment is actually made by B to A. In fact, a swap is a combination of (i) a call sold to B by A and (ii) a put sold to A by B. The strike S is selected such that the call and put command the same premium. Thus, this study will focus on the analysis of call and put contracts only.

A generic weather derivative contract can be formulated by specifying the following seven parameters:

• contract type (call or put),
• contract period,
• an official weather station from which the meteorological record is obtained,
• definition of weather index (W) underlying the contract,
• strike (S),
• tick (k) or constant payment (PO) for a linear or binary payment scheme, and
• premium.

The parameters above determine the amount of payment (P) that the seller is obliged to make to the buyer. For a linear payment scheme,

Pput = kmax (S – W, 0) and
Pcall = kmax (W – S, 0), (1)
where the function max(x, y) returns the greater of values x or y. For a binary payment scheme,
Pput = P0 if W – S < 0; Pput = 0 if W – S ≥ 0 and
Pcall = P0 if W – S > 0; Pcall = 0 if W – S ≤ 0. (2)

Applications

Because the choice of W is extremely flexible, weather derivatives can be structured to meet a wide variety of risk management needs. The best-known examples are related to the consumption of electricity that is significantly affected by the seasonal temperature variations. An abnormally cool summer or warm winter decreases not only the number of kilowatt hours (KWHs) consumed but also the price per KWH in the unregulated energy trading market, reducing the revenue of utility companies that sell electricity. The same risk also applies to buyers of electricity, because an abnormally cold winter or hot summer can cause both the unit price and the consumption to rise. To manage these risks, derivative contracts based on seasonal accumulated heating degree days (HDD) and accumulated cooling degree days (CDD) are frequently used. HDD and CDD are defined as

where N is the number of days over the contract period and Ti is the arithmetic average of the observed daily maximum and minimum temperatures on the ith day of the contract. HDD and CDD measure the respective need for heating and cooling in order for people to stay comfortable. For example, a utility company can protect itself against revenue shortfalls due to a possible warm winter by buying an HDD put with a linear payment scheme [Eq. (1)]. The contract parameters are usually determined based on the company’s experience of the relationship between the revenue fluctuations and HDD variations. On the other hand, a major user of electricity may buy an HDD call to prepare for the high utility cost due to a winter colder than normal.

Besides the widely used HDD and CDD call and put contracts, there is a growing number of new and innovative uses of weather derivatives. In the following example, a snow blower retailer, in order to generate sales, promised its customers a sizable rebate if the total snowfall for the coming winter were less than a threshold. Consequently, the company would face a substantial liability if the snow level were below the threshold. The company, however, could completely transfer the risk by buying a total snowfall put with a strike equal to the threshold in the rebate contract.

In this case, a binary payment scheme [Eq. (2)] would serve the purpose better than a linear one does because the rebate would be triggered in a binary fashion.

The sellers of weather derivatives usually include major energy companies, who use these products to hedge their own risks and make trading profits. Insurance and reinsurance companies are also becoming important sellers, as they look for alternative ways to deploy their capital. Although the relatively short history of the weather derivative market does not allow a thorough analysis of the correlation between the performance of the weather derivatives and the general financial market, it is widely perceived that the correlation is negligible. Thus, they are appealing to a wide array of investors.

NCDEX: Trading of a Weather Index, an example

• Suppose we consider a small rice farmer
• Acreage: 1.5 hectares of land
• Yield of crop: 2000 kg/ha
• Output produced (yield * acreage)= 3 tones (valued at Rs. 33,000/-)
• Farmer hedges his risk against bad monsoon
• Farmer buys a weather index option
  • Notional value of Rs. 10,000/-
  • Premium priced at 3%
• Farmer buys a put option on August 15, paying a premium of Rs. 300/- at an index level of 1265
• Multiplier (for every unit shortfall in the index) will be Rs. 8/- (viz. contract value / index value)
• On expiry of the contract on September 20, the index drops to 1206 due to shortfall in rain
• Farmer exercises his option and gets paid Rs. 472/- and makes a gain of Rs. 172/-

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Drought Monitoring Using Soil Moisture Index (smi)

Drought is a temporary aberration in rainfall over a region and should be considered a relative than absolute condition. It is not a disaster by itself, but it becomes so depending upon the extent of damage it causes to environment and economy of the people. Drought does not appear all of a sudden. It is a slow moving disaster covering large area. Droughts have profound impacts on environment and on the society they are further aggravated due to

• Climate of the region
• Shortage of farm inputs and seeds
• Shortage of water resources
• Shortage of power
• Lack of drought management plans, credit facilities
• Malnutrition and diseases.

Droughts in the country have shown recession in growth rate and GDP was negative up to 1990 and the variability in monsoon rainfall did not affect the Indian economy as in the past. This can be attributed to the fact that the share of agriculture in national economy gradually decreased over the decades from 51% in 1961 and 35% in 1987-88 to 22% in 2002 and 14.6% in 2009.

Droughts are broadly categorized in to four types

• Meteorological
• Hydrological
• Agricultural
• Socio-economic

For monitoring and assessment of various types of Drought conditions suitable computational procedures were developed to compute appropriate indices based on the availability of data and its applicability over large areas. Broadly drought indices are classified as

• Rainfall based indices
• Climate derivate based indices
• Remote sensing based indices

The rainfall based indices provides information on the deviations of rainfall from its climatological averages over a region. Whereas climate derivate based indices like Moisture Adequacy Index (MAI), Soil Moisture Index(SMI), Aridity index(Ia) , Soil water index(SWI) are computed from Climatic Water balance procedures are useful in monitoring actual field conditions experienced by agricultural crops. The remote sensing indices like NDVI would assess the severity of drought by computing its departure from the long term average NDVI values.

Since climate derivate based indices are used in monitoring water stress and drought conditions experienced by the crop, they are more useful in crop management and weather based agro advisories. Among them the soil moisture index (SMI):which is defined as the ratio of Actual Soil Moisture to that Available Soil water OR Water Holding capacity(difference between field capacity and the permanent wilting point).These values are computed on weekly basis using Thronthwaite and Mather(1955) climatic water balance procedure.

The output from the computations provides information on actual soil moisture storage, actual evapotranspiration (AE), water deficit (WD), water surplus (WS), SMI etc .By computing the SMI values for each week during the growing period and over number of location in a region, the distribution of soil moisture availability for the plants over a region can be worked out using GIS and maps can be prepared for each week. The intensity of drought based on SMI values are as follows

• SMI>0.75-drought free(Wet soil)
• 0.50to0.75-mild drought(moderately wet soil)
• 0.25 to 0.50-moderate Drought(Dry Soil)
• <0.25 SMI- severe Drought(Extremely Dry soil)

These weekly maps shall provide information on the status of drought conditions over the time period at different regions of interest .Crop information about the stage and the Weather forecast for next 5-7 days shall help in preparing the region wise crop advisories for sustainable productivity. The farmers can be forewarned to take up adequate measures to save crop from climate risks. As an example, soil moisture index values (SMI) computed for Jalana District during the current season(31 week ) correspond to First week of August of 2015 in Maharashtra is enclosed.

From the weekly water balance computations, other climate derivates like MAI and Ia are also computed from the AWS data for monitoring drought conditions over a region.

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Our USPs

Did you know 40 to 80 percent of all business activities are affected by the weather?

• We are the leading provider of weather data to the energy, weather insurance and agricultural commodities markets other than government agencies.
• We provide the most reliable and timely information for weather risk transactions.
• We have developed a leading-edge set of techniques and algorithms to clean and enhance historical and daily weather data, in consultation with various meteorological experts.

Industry	Weather Element	Risk
Energy Industry	Temperature, Precipitation and Relative Humidity	Lower sales during warm winters or cool summers; adequate rainfall for agricultural purpose.
Energy Consumers	Temperature, Precipitation and Relative Humidity	Higher heating/cooling costs during cold winters and hot summers.
Beverage Producers	Temperature	Lower sales during cool summers
Building Material Companies	Precipitation and Temperature	Lower sales during monsoon / severe winters (construction sites shut down)
Construction Companies	Temperature, Snowfall and Precipitation	Delays in meeting schedules during periods of poor weather
Agricultural Industry	Temperature and Precipitation	Significant crop losses due to extreme temperatures or catastrophic rainfall or drought
Salt Industry	Solar radiation, Temperature, Precipitation and Relative Humidity	Lower revenues during low temperature or rainfall which extends the drying time.
Hydro-electric power generation	Precipitation	Lower revenue during periods of drought
Wind Turbines	Wind Speed	Lower revenue during no or very little wind speed
Transport Industry	Precipitation	Catastrophic rainfall disturbs rain or road transport; hence delay in goods delivery

NCML provides information about crop health and development with focus on:

• Remote sensing technology provides information about crop health, by regularly monitoring crops to Agricultural producers (Farmers).
• Commodity Traders and the Food Industry receive more detailed and timely information on crop development and yield predictions.
• We offer tools and services for an effective geographical modeling of agriculture insurance risks.
• Crop maps provided by us determine accurately what farmers have planted and also help in determining the premiums and risk profiles.
• We support the loss adjustment process by providing quick and reliable information about damaged areas.

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Services & Markets Covered

We, an action-oriented risk-management company, provide a wide range of solutions for stakeholders in commodities and our “Commodity & Trade Intelligence” team is offering the following services to empower our clients deal with the price risk, information risk and physical commodity risks:

• Drawing up the risk profile of the client entity in the commodity sector and suggest appropriate solutions to optimize the supply-chain values.
• Setting up of internal risk management guidelines, including a board driven policy and necessary operational guidelines.
• Daily technical and fundamental analysis on each commodity of relevance to the client, together with the procurement and/or trade strategy for the day on the commodity exchange, domestic or international.
• Track the prices of the relevant commodities in different cash and derivative markets across the world.
• Hand-holding to implement appropriate procurement and hedging/trading strategies.
• Obtaining necessary regulatory approvals for the hedge programmes and filing of reports and forms with the regulators.
• Executing the hedging/trading and procurement tasks on behalf of the client to effectively deal with the complexities of trading in different time-zones, through different institutional brokers/ FCMs at various exchanges across the globe.

 

Our Key Strengths

• Presence of strong in-house action oriented research team with domain knowledge on commodities, trading and various risk management strategies.
• Experienced experts of fundamental and technical analysis of the commodities providing accurate prediction for short, medium and long term price outlook of agricultural products.
• Facilitating the client operations strictly within the set operational framework of hedging , besides assisting client in laying down criterion for :
  • Deciding the right exchange and hedge instrument viz. future (and/or) options.
  • Deciding target price for hedging by linking it with the purchase prices of the commodity in the underlying physical marketsTD.
  • Deciding the entry / exit strategies from cash & futures markets.
  • Stop-loss and downward adjustments to ensure purchase prices within the target price range.

Markets Covered

• Global & Domestic commodity exchanges for hedging commodity risks.
• Global OTC markets for hedging freight and currency risks.

• NCML provided technical consultancy and trading services to the largest grain hedge transaction by an Indian corporation on global commodity exchanges (value over USD 5 billion).
• As a technical consultant we facilitated the first “physically settled OTC Call options market” for agro commodities in the country.
• As a technical consultant we have also facilitated Ministry of consumer affairs by undertaking a study for “assessing the structural factors behind food inflation in India and Identification of major structural factors responsible for price rise of major food items in the country i.e. rice, wheat, pulses, edible oil, vegetable (Onion, Tomato & Potato), sugar and milk over last five years”.

• NCML can facilitate freight risks hedging on global OTC markets, which is reported to be first of its kind by any domestic firm.

Our USPs

• NCML provided technical consultancy and trading services to the largest grain hedge transaction by an Indian corporation on global commodity exchanges (value over USD 5 billion).
• As a technical consultant we facilitated the first “physically settled OTC Call options market” for agro commodities in the country.

• NCML can facilitate freight risks hedging on global OTC markets, which is reported to be first of its kind by any domestic firm.

Knowledge Management: Click here to view more

• Agriculture & Food Policy Reforms
• Agriculture Commodity Reviews & Price Trends
• Metals, Bullions & Energy
• Commodity Futures Market
• Agriculture Markets
• Weather
• Warehousing, Warehouse Receipt Finance & Logistics
• Agricultural Credit & Finance
• Food Testing & Safety

Consultancy

NCML office Advisory and consultancy services along the entire supply chain. Retained by the Government of India (GOI) and by agencies like State Trading Coroporation of India (STC) and Food Corporation of India (FCI) as Technical Consultant. Consultancy services extend to providing IT solutions and MIS to the entire warehouse management system .