Recently, I was privileged to meet with a group of snow contractors from around the country where we discussed topics related to the snow industry. At one point, we were told of a new program being brought to the industry by Snow Magazine and Chicago Weather Brokerage (www.cwbrokerage.com), whereby the Chicago Mercantile Exchange (CME Group) will make available snowfall contracts. These snowfall contracts, available beginning Dec. 7, will allow snow contractors to protect themselves and their customers against abnormally high or low snowfall totals for a given season, month or group of months.
No, it’s not insurance.
Insurance has been available for years. It works, but it is prohibitively expensive for the average snow contractor.
Instead, the CME Group’s snowfall contracts will listed on the Exchange and will be available for trading to all snow contractors. The group I was working with really got into this concept, and peppered the presenters with questions. The overall consensus: "It’s about time someone thought of a way to do this."
The folks who put this together include some very knowledgeable and well-ingrained individuals from the snow industry. Quite frankly, I was a bit annoyed at myself for not thinking of it sooner. However, these professionals have invested a considerable amount of time and energy to develop this program and set it up for snow contractors.
An oversimplification of the way it works goes like this: If you live or work in the Cleveland area (as an example), and the average snowfall (measured at Cleveland Hopkins International Airport) is 55 inches, then you can purchase a snowfall contract at $1,000 stating the snowfall this season will be less than 20 inches. If you are correct, then at the end of the season you’ll get $10,000 back for that $1,000 contract.
Of course the buy-in amount changes as the season progresses and it becomes more obvious what the winter total might be or exceed. Contractors can purchase as many snowfall contracts as they wish.
Additionally, you’re not held to 20 inches in a 55-inch market. There will be other totals you can purchase a snowfall contract on – maybe 30 inches or 100 inches. As I said, this will also be done for monthly snow averages.
I would venture to say snowfall contracts could become a revolutionary financial product for the snow industry. The contractor could purchase snowfall contracts for each customer – possibly charging the customer for the "hedge" against potential snowfall scenarios. The variations seem only limited by the imagination. Before this concept, we cold only dream of this level of sophistication.
I’m certain a lot will be written about the CME Group’s snowfall contracts in the coming months – and not only in the snow industry trades. Wall Street will likely sit up and take notice, too. Just imagine: a way to really protect ourselves from those winters when it doesn’t snow.
Damn. I wish I’d thought of that.
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