Files
Abstract
Agricultural yield and commodity prices are very sensitive to weather patterns such as
drought, excessive rain, or frost. As a result unseasonable weather can cause major losses for
players in the agricultural value chain, including input providers, farmers, commodity traders,
and food processors. The National Crop Insurance Service (NCIS) estimates that about 70%
of the losses suffered by the US crop insurance scheme result from drought or excessive
rainfall. In this paper information recorded by PriceWaterhouseCoopers on behalf of the
Weather Risk Management Association is complemented by Swiss Re's market intelligence
to examine demand patterns for weather risk transfer solutions. There is a particular focus on
the evolution of demand from the energy sector compared to the agricultural sector as a means
of identifying the critical success factors needed for a prospering market. We found that
recent growth in the weather risk transfer market is mainly related to speculative trading in
the energy sector. Stakeholders in the agricultural sector around the world are growing
increasingly interested in weather risk transfer products. However, the lack of exchange-based
instruments in this field, the relatively high basis risk between weather indexes and
agricultural yield, the fact that agricultural markets are still highly regulated and inadequate
information and training are all impeding the growth of this business.