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Managing Dairy Profit Risk Using Weather Derivatives

Author

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  • Chen, Gang
  • Roberts, Matthew C.
  • Thraen, Cameron S.

Abstract

Weather conditions are the primary dairy production risk. Hot and humid weather induces heat stress, which reduces both the quantity and quality of milk production. Traditional heat abatement technologies control the environment through ventilation, misting or evaporative cooling. Usually, they can increase the producers' expected profit, but cannot cover all the profit losses from heat stress. Weather derivatives could reduce weather-induced profit risk and thus act as a substitute for traditional abatement technologies in the aspect of risk management. We test the risk management value of weather derivatives in a utility maximization framework. The result is that weather derivatives offer an opportunity to improve the efficient portfolio frontier, and simultaneously using weather derivatives and abatement equipment is more favorable than using each of them alone.

Suggested Citation

  • Chen, Gang & Roberts, Matthew C. & Thraen, Cameron S., 2003. "Managing Dairy Profit Risk Using Weather Derivatives," 2003 Conference, April 21-22, 2003, St. Louis, Missouri 18971, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:ncrthr:18971
    DOI: 10.22004/ag.econ.18971
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    Cited by:

    1. Raucci, Gian Lucca & Silveira, Rodrigo Lanna F. & Capitani, Daniel H D, "undated". "Development Of Weather Derivatives: Evidence From Brazilian Soybean Market," 2018 Annual Meeting, August 5-7, Washington, D.C. 274105, Agricultural and Applied Economics Association.
    2. Ivana STULEC & Kristina PETLJAK & Tomislav BAKOVIC, 2016. "Effectiveness of weather derivatives as a hedge against the weather risk in agriculture," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 62(8), pages 356-362.
    3. Tonsor, Glynn T., 2008. "Hedging in Presence of Market Access Risk," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37621, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Deng, Xiaohui & Barnett, Barry J. & Hoogenboom, Gerrit & Yu, Yingzhuo & Garcia, Axel, 2006. "Evaluating the Efficiency of Crop Index Insurance Products," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35333, Southern Agricultural Economics Association.
    5. Haruyoshi Ito & Jing Ai & Akihiko Ozawa, 2016. "Managing Weather Risks: The Case of J. League Soccer Teams in Japan," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(4), pages 877-912, December.
    6. Å tulec, Ivana & Petljak, Kristina & Naletina, Dora, 2019. "Weather impact on retail sales: How can weather derivatives help with adverse weather deviations?," Journal of Retailing and Consumer Services, Elsevier, vol. 49(C), pages 1-10.
    7. Musshoff, Oliver & Odening, Martin & Xu, Wei, 2005. "Zur Bewertung von Wetterderivaten als innovative Risikomanagementinstrumente in der Landwirtschaft," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 54(04), pages 1-13.
    8. Vroege, Willemijn & Dalhaus, Tobias & Wauters, Erwin & Finger, Robert, 2023. "Effects of extreme heat on milk quantity and quality," Agricultural Systems, Elsevier, vol. 210(C).

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