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Leveraging ClimateAi’s Monitor Yield Outlook to Enable Multimillion Profits in Hedging Strategy

April 19th, 2024

Corn field

  • A leading supplier of high-purity alcohols, specialty solvents, custom-blended solutions and fuel ethanol that secures and processes high volumes of commodities like corn was using several data points and expert teams to inform their multi-pronged strategy for contracting, hedging, and pricing.
  • The company was looking for a new way to build a competitive advantage in the crowded commodities contracting market. Because weather and climate have strong correlations with the availability and price of corn on the spot market, the company realized that factoring in weather and climate insights at key corn-growing locations could build an even more comprehensive strategy.
  • The company turned to ClimateAi for its granular AI-enhanced climate risk forecasting, specifically for its yield outlook reports, which show how forecasted weather and climate events for the season ahead will impact the yield of major commodities.
  • They used ClimateLens Monitor Yield Outlook to inform their contracting strategy and capture new value. This data supported a strategy in the 2022 season to generate at least $2 million in net new alpha.

Challenge: Securing Commodities Volumes At Low Prices

Commodities processors often face challenges in securing their large-scale supply needs. A primary concern is volume security — ensuring enough commodity volume is available at a large scale. Sourcing from a single region exposes the business to global price fluctuations and potential supply disruptions. Even though local prices might be stable, global factors can significantly impact their ability to acquire commodities, as well as their cost. Plus, the business has to make crucial decisions regarding contracting/volume allocation months in advance. This necessitates early insights into the global market to optimize their contracting strategy and navigate price volatility.

This challenge demands a multi-pronged approach:

  • Diversification: Exploring and establishing reliable secondary sources in geographically distinct regions to mitigate dependence on a single location.
  • Supplier Relationship Management: Building strong relationships with existing and potential suppliers to secure long-term contracts and preferential access to their resources.
  • Market Intelligence: Implementing robust market research and analysis tools to gain insights into future trends, potential disruptions, and price fluctuations. This allows for informed decision-making regarding volume allocation and contracting strategies.

Solution: ClimateLens Monitor Yield Outlook

The company chose to partner with ClimateAi and used ClimateLens Monitor Yield Outlook to understand expected volumes at key sourcing locations, to help drive their contracting strategy. The AI-driven Yield Outlook report translates weather-related hazards into impact on yield across multiple corn regions, taking into account timing and severity of the hazard relative to the crop’s phenological stage and hazard vulnerability.

Reports are updated weekly throughout the season so that the team can understand how changing conditions can impact expected yield. With granular, location-specific forecasts, the team has access to more specific data on direct sourcing locations, rather than solely relying on general market analysis. ClimateAi ensures all deployed models undergo rigorous development and validation processes, ensuring their accuracy and reliability.

The company received insight from ClimateAi during the planting phase of the 2022 corn-growing season that the US corn market would be affected by cold stress during planting, likely leading to lower yield. This report informed their decision to proactively lock in desired volumes at favorable terms with this advance knowledge.

They continued to use ClimateAi’s reports in 2023, and expanded their contract to use its other tools for even more insights, such as ClimateLens Monitor, which offers day-to-day and weeks ahead forecasts on specific climatological variables, to enable operational decision-making on a 1-6-month timescale.

Results: Potential Gains from Proactive Market Action

The company used ClimateLens Monitor Yield Outlook to inform its contracting decisions. This analysis shows how ClimateAi’s platform yielded promising results:

1. Planting: ClimateAi identified risks related to cold stress during corn planting before other sources. This forecast proved correct and the planting season was negatively affected, resulting in increased market volatility and higher prices.

2. Mid-season: ClimateAi identified potential yield forecast improvements, allowing the business to adjust their positions reflecting this more optimistic outlook. This forecast again proved correct; acting upon these recommendations by leveraging call options supported their strategy, netting anywhere from $2 million to $6 million depending on timing of the action.

Key Takeaways:

  • ClimateAi’s accurate yield outlook provided valuable insights that drove profitability and mitigated supply risk
  • Market volatility created by the predicted yield reduction presented an opportunity for significant gains through call options.

Disclaimer: This analysis is for informational purposes only and should not be considered financial advice. Market conditions are subject to change, and past performance does not guarantee future results.