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The Performance Of Weather Derivatives In Managing Risks Of Specialty Crops

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Author Info

  • Fleege, Trevor A.
  • Richards, Timothy J.
  • Manfredo, Mark R.
  • Sanders, Dwight R.

Abstract

California specialty crop growers are exposed to extreme price volatility, as well as considerable yield volatility caused by fluctuations in temperature, precipitation, and other specific weather events. Weather derivatives do provide a promising market-based solution to managing risks for specialty crops. While previous weather derivatives research has focused on the pricing of weather options, little if any research has been conducted evaluating the hedging effectiveness of these instruments in practical risk management settings. Therefore, this research examines the hedging effectiveness of weather derivative strategies for nectarines, raisin grapes, and almonds in Central California. Estimates of the yield-weather relationships for these crops are found to be non-linear, suggesting a straddle strategy (long put and long call) in weather options. Simulation results also suggest that specialty crop producers can improve their net income distribution through the use of weather derivative strategies. This is particularly true when the correlation between price and yields is low.

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Bibliographic Info

Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2004 Conference, April 19-20, 2004, St. Louis, Missouri with number 19026.

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Date of creation: 2004
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Handle: RePEc:ags:ncrfou:19026

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Web page: http://www.agebb.missouri.edu/ncrext/ncr134/

Related research

Keywords: Crop Production/Industries; Risk and Uncertainty;

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Cited by:
  1. Manfredo, Mark R. & Richards, Timothy J., 2005. "Hedging Yield with Weather Derivatives: A Role for Options," 2005 Annual meeting, July 24-27, Providence, RI 19369, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Xu, Wei & Odening, Martin & Musshoff, Oliver, 2007. "Indifference Pricing of Weather Insurance," 101st Seminar, July 5-6, 2007, Berlin Germany 9267, European Association of Agricultural Economists.

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