Economics at your fingertips  

Hedging weather risk for corn production in Northeastern China: The efficiency of weather-indexed insurance

Baojing Sun, Changhao Guo and Gerrit van Kooten

Agricultural Finance Review, 2014, vol. 74, issue 4, 555-572

Abstract: Purpose - – The paper analyzes the hedging efficiency of weather-indexed insurance for corn production in Northeast of China. The purpose of this paper is to identify the potential weather variables that impact corn yields and to analyze the efficiency of weather-indexed insurance under varying thresholds for payouts (strike values). Design/methodology/approach - – Statistical relationships between climate variables and crop yields are used to construct weather-indexed insurance that enable a farmer to hedge against adverse precipitation outcomes. Mean root square loss is used to compare the efficiency of various weather products. Findings - – Based on efficiency comparisons, it turns out that in some, but not all circumstances, cumulative rainfall (CR) insurance can be used to hedge weather risk. When CR explains one-third or more of the variation in corn yields, a hedge can offset the revenue loss caused by the corresponding weather risk; but when it explains much less of the yield variation, it is inefficient for hedgers to buy weather insurance. If CR explains variation in crop yields, it is increasingly efficient to employ CR-indexed insurance as strike values decline for put options or increase for call options. Practical implications - – The paper provides a method for calculating the premium for an insurance product that provides a payout if CR in a growing season is too low. Originality/value - – This research is important because it illustrates the potential benefits of using weather insurance as an agricultural risk management strategy in China.

Keywords: Agricultural risk management; Corn yield-climate relation; Financial weather products; Weather insurance (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... /journals.htm?id=afr

Access Statistics for this article

Agricultural Finance Review is currently edited by Professor Calum G. Turvey

More articles in Agricultural Finance Review from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

Page updated 2021-06-20
Handle: RePEc:eme:afrpps:v:74:y:2014:i:4:p:555-572