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The current spell of sweltering weather has constituted a breath of fresh air for a wide range of businesses, boosting sales of items such as air conditioners, summer clothes, ice cream, beer and soft drinks.

An increase in temperature of 1 degree might translate, for example, into 1 million additional sales of 633-ml bottles of beer and “happoshu” low-malt beverages.

But what if the weather had been different?

To cope with worst-case scenarios, many weather-sensitive businesses are trying to protect themselves against the effects of adverse weather conditions such as cool summers and mild winters.

More specifically, they are turning to so-called weather derivatives — schemes derived from financial derivatives to hedge against unexpected market fluctuations.

Developed in the United States and introduced in Japan during the summer of 1999, weather derivatives have attracted a good number of retailers and resort operators.

“Before weather derivatives were invented, businesses could do little about weather, which is often classified as an ‘act of God,’ ” said Kaoru Hijikata, director of the Derivative Products Group of Mitsui Marine & Fire Insurance Co.

“Now, more and more businesses are becoming aware of weather derivatives’ usefulness as tools to hedge against weather-related risks and minimize fluctuations in business performance,” Hijikata said.

In June 1999, Mitsui Marine sealed a weather derivative contract with Himaraya Co., a Gifu-based sporting goods retailer, marking the first such union in Japan.

Himaraya officials said they decided to hedge against insufficient snowfall — a factor hampering sales of winter sporting goods — after suffering a major setback in sales due to mild weather the previous winter.

Under the contract, which covered the period between Dec. 1 and Dec. 31, 1999, Himaraya paid a 10 million yen one-time premium in order to receive a maximum of 108 million yen in compensation should there have been a lack of snow.

Insurance payments were to be made in accordance with the accumulated number of days when the snow in three designated points at popular ski resorts in the Chubu region stood at 10 cm deep or less during the contract period.

Last winter, Himaraya entered three similar weather derivative contracts with Mitsui Marine, the Bank of Tokyo Mitsubishi and the Industrial Bank of Japan.

For the coming winter, the company has already received eight such offers — two from insurers and six from banks — according to Yoichi Kuzuya, manager of Himaraya’s Management and Planning Office.

The company is, however, having second thoughts on this occasion, he said, noting that some within the company are questioning whether these contracts are worth the price.

Indeed, Himaraya received no insurance money during the past two winters as the weather failed to meet the conditions required for compensation payments.

“Such conditions are determined based on the weather data in the past,” he said. “And the recent tendency of warm winters is making the conditions more difficult to meet, giving less chance for us to collect insurance money.”

Such setbacks aside, some retailers are attempting to take full advantage of weather derivatives, using the schemes as leverage for sales promotions.

This year, Ito-Yokado Co., a supermarket chain operator, sealed a weather derivative contract with Mitsui Marine, insuring air conditioner sales at its 145 stores against the possibility of a cool summer.

Ito-Yokado will be compensated if Tokyo’s average temperature during the period between July 20 and Aug. 31 comes to 2.5 degrees or more below 26.9, the average temperature for the same period in the past 30 years.

In this event, Ito-Yokado has promised to refund 10,000 yen for air conditioners bought between June 13 and July 1.

Ito-Yokado spokesman Kimihiko Sato said that sales of air conditioners during the campaign period were up more than 20 percent from the previous year.

Although these sales figures are mainly attributable to the summer’s intense heat, the refund pledge probably induced favorable reactions from customers, he said.

According to the Weather Risk Management Association, accumulated transactions involving weather risk-related products have reached $7.5 billion worldwide since the first such deal was sealed in the winter of 1997.

The Washington-based trade organization consists of more than 70 companies around the world, including Enron Corp. of the U.S., Societe Generale of France, as well as Mitsui Marine, the Industrial Bank of Japan and Tokyo Electric Power Co.

In a report released in June, WRMA said that the worldwide market for weather control businesses has now entered a maturing stage with the scope of targeted risks having expanded from excessive heat and cold to include rain, snow and wind.

“What was once the province of the utility and energy industry is now being utilized by ski resorts, beverage providers, retailers and agribusiness, to name just a few,” WRMA President Ravi Nathan said in a statement.

The Japanese market, estimated at more than 50 billion yen in accumulated values with nearly 1,000 contracts concluded, will also probably get a further boost in the coming years.

While the current market covers a wide range of clients, from food wholesalers and seasonal goods retailers to golf course and other resort operators, the prospective liberalization of the energy market is expected to become a driving force.

Tokyo Electric Power Co. and Tokyo Gas Co. recently sealed a contract to compensate each other, capitalizing on the opposing trends of their business performance in relation to the weather.

Power companies benefit from a hot summer, which boosts electricity demand due to the heavy use of air-conditioners, while gas firms suffer a drop in sales due to lower demand for hot water. Their fates are inverted during a cool summer.

Under the contract agreed between Tepco and Tokyo Gas, the two companies agreed to pay each other a maximum of 700 million yen in compensation should the average temperature in Tokyo’s Otemachi district during the Aug. 1- Sept. 30 period go up or down by 0.5 degrees or more from a designated level.

“It was a significant move, for the deal clearly showed the utility firms’ concern about a weather risk,” said Toshihiko Aizawa, leader of the Product Development Group of Tokio Marine & Fire Insurance Co.

“Although that contract didn’t involve a middleman, we’ll see greater chances of mediating similar deals, as the utility industry will undergo deregulation and be forced to hedge risks against their commodities’ market fluctuation caused by ups and downs of temperature.”

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