Weather

Whatever the Weather

How United Grain Growers tamed Mother Nature in completing the deal of the decade.

Russ Banham - CFO Magazine

June 1, 2000

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Like a farmer in the Great Depression, Peter Cox battled Mother Nature with little more than skyward eyes and mumbled hopes. Although the CFO of United Grain Growers (UGG) has never tilled an acre, he knows full well that the earnings of the Winnipeg, Manitoba-based grain handler, with $120 million in annual revenues, hang on the whims of the weather.

UGG buys grains, such as wheat and barley, and ships them for sale worldwide. Every dozen years or so, however, a drought would dry up grain production--and along with it about 20 percent of the company's revenues. "When grain volumes fell, so did our earnings," says Cox.

That didn't sit well with the CFO, who was also unable to hedge UGG's grain-volume risk, because of the diversity of weather patterns in different Canadian provinces. Consequently, Cox turned to his insurance broker, London-based Willis Corroon Corp., to formulate a solution. Together with insurer Swiss Re New Markets, they developed a first-of-its-kind insurance program that absorbs the downside of lower grain volume without taking away the upside of greater volume.

The upside for UGG has been staggering. By calming its earnings volatility, UGG has improved cash flow and increased its leverage opportunities. The insurance has also provided off-balance-sheet capital to invest in higher risk higher return ventures. And the cost of the policy, which blends UGG's grain-volume risk with its myriad property/casualty exposures in a single, integrated portfolio, is comparable to what the company paid for its 20 or so separate insurance policies.

Analysts evidently are bullish on the strategy. UGG's stock price jumped...