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Weather-based instruments in the context of whole-farm risk management


  • Ernst Berg
  • Bernhard Schmitz


Recent and presumable future developments tend to increase the risks associated with farming activities. These include climate risks, which have always played an important role in farming. Weather-based instruments can be valuable tools to reduce the risk associated with unfavourable climate events. However, a number of factors could limit the hedging effectiveness of these tools. These factors include basis risk, the impacts of remaining price uncertainty, and diversification effects. This paper addresses the influence of each of these factors. In the final section, an integrated approach for a comprehensive assessment of weather derivatives and other hedging instruments is proposed that is based on the concept of portfolio optimization.

Suggested Citation

  • Ernst Berg & Bernhard Schmitz, 2008. "Weather-based instruments in the context of whole-farm risk management," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 119-133, May.
  • Handle: RePEc:eme:afrpps:v:68:y:2008:i:1:p:119-133

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    References listed on IDEAS

    1. John C. Quiggin & Giannis Karagiannis & J. Stanton, 1993. "Crop Insurance And Crop Production: An Empirical Study Of Moral Hazard And Adverse Selection," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 37(2), pages 95-113, August.
    2. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
    3. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
    4. Barnett, Barry J., 2004. "Agricultural Index Insurance Products: Strengths And Limitations," Agricultural Outlook Forum 2004 32971, United States Department of Agriculture, Agricultural Outlook Forum.
    5. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
    6. Moschini, Giancarlo & Hennessy, David A., 2001. "Uncertainty, risk aversion, and risk management for agricultural producers," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 2, pages 88-153 Elsevier.
    7. Goodwin, Barry K., 1994. "Premium Rate Determination In The Federal Crop Insurance Program: What Do Averages Have To Say About Risk?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(02), December.
    8. Nimon, R. Wesley & Mishra, Ashok K., 2001. "Revenue Insurance and Chemical Input Use Rates," 2001 Annual meeting, August 5-8, Chicago, IL 20669, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Cited by:

    1. Mußhoff, Oliver & Grüner, Sven & Hirschauer, Norbert, 2014. "Muss man begrenzte Rationalität und heuristisches Entscheiden bei der Erklärung für die Verbreitung von Wetterindexversicherungen in der Landwirtschaft berücksichtigen? – Eine Untersuchung auf d," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 63(2).
    2. M. Ritter & O. Mußhoff & M. Odening, 2014. "Minimizing Geographical Basis Risk of Weather Derivatives Using A Multi-Site Rainfall Model," Computational Economics, Springer;Society for Computational Economics, vol. 44(1), pages 67-86, June.
    3. Buchholz, Matthias & Musshoff, Oliver, 2014. "The role of weather derivatives and portfolio effects in agricultural water management," Agricultural Water Management, Elsevier, vol. 146(C), pages 34-44.
    4. Pelka, Niels & Mußhoff, Oliver, 2013. "Das Risikoreduzierungspotenzial von Wetterderivaten im Ackerbau: Einfachindizes versus Mischindizes," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 62(4).
    5. Pelka, Niels & Weber, Ron & Musshoff, Oliver, 2015. "Does weather matter? How rainfall shocks affect credit risk in agricultural micro-finance," 2015 Conference, August 9-14, 2015, Milan, Italy 212617, International Association of Agricultural Economists.
    6. Kellner, Ulla & Musshoff, Oliver, 2011. "Precipitation or water capacity indices? An analysis of the benefits of alternative underlyings for index insurance," Agricultural Systems, Elsevier, vol. 104(8), pages 645-653, October.
    7. Römer, Ulf & Mußhoff, Oliver, 2017. "Can agricultural credit scoring for microfinance institutions be implemented and improved by weather data?," DARE Discussion Papers 1703, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    8. Leif Erec Heimfarth & Oliver Musshoff, 2011. "Weather index-based insurances for farmers in the North China Plain: An analysis of risk reduction potential and basis risk," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 218-239, August.
    9. Hotopp, Henning & Mußhoff, Oliver, 2012. "Can rent adjustment clauses reduce the income risk of farms?," International Journal of Agricultural Management, Institute of Agricultural Management;International Farm Management Association, vol. 1(4), July.


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