“Climate and weather are significant factors affecting agriculture production around the world. Both seasonal and regional variability in weather directly influence crop yield potential.” – USDA’s Major World Crop Areas and Climate Profiles report
Farmers around the world are grappling with rising production costs, stricter rules on use of agrochemicals, and fluctuating weather patterns. As a result farmers need to be increasingly efficient in their management practices.
While advances in technology have enabled farmers to integrate the use of high-yield seed varieties and planned applications of fertilizers, herbicides, and fungicides, weather remains a major factor. From plantation to harvest, precipitation, temperature, sunshine hours and wind can affect the quality and quantity of a crop.
The correlation between crop volumes and weather can result in a successful yield or a financial disaster. For more than a decade, weather risk management tools (including futures contracts, reinsurance and weather derivatives) have been used to minimize the financial effects of such climatic fluctuations. Losses due to too much rain, too little rain, and excessive heat or cold can be mitigated by using appropriate weather risk management tools.
Weather indexed insurance
Weather indexed insurance is a tool that is gaining wide acceptance as an alternative to a traditional crop insurance program. Weather indexed insurance is based on local weather indices. Payouts are triggered by the specified components of the index rather than crop yields. The components of a weather index include measurable weather variables, such as temperature or rainfall; a specified duration; and specific weather stations. Once the weather data has been obtained, an index can be derived by reviewing how the weather variables have impacted crop yields over time. In addition, a weather index will account for the impact of weather factors on crops during different stages of development.
In Europe, multi perils insurance is a key trend. Both state and private insurers are keen to add this broader range of coverage. Hail insurance has always been important for European farmers. Yet there’s a need for coverage that includes not only hail, but temperature and precipitation as well. Multi perils insurance will encompass the full range of weather events, giving farmers comprehensive coverage.
Weather crop index insurance is being used in Malawi, Tanzania, Rwanda, India and the Philippines. A weather crop index insurance program was launched in Kenya in 2010 to insure tea, coffee and corn producers against drought. The insurance will payout if data from a nearby weather station shows too much rainfall or not enough. The payout amount will be indexed to historical rainfall for the area. The World Bank is working with Jamaica on weather insurance for their coffee crop.
In countries where the trend is to use more biofuels for transportation and power generation, weather risk management tools are essential. In the biofuels market, mitigating weather risk is a key to keeping biofuels operations viable. If the yield on a biofuels crop is less than expected due to lower than normal temperatures, a weather risk product can be used. If the crop has been hedged using a temperature-related weather risk product, the dollar amount of the crop loss is offset by the payout of the weather hedge. While a weather hedge won’t replace lost barrels of ethanol, it can help the biofuels producer to continue to operate instead of suffering what could be a crippling financial loss.
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