Weatherrisk hedging by farmers

• Published in: The journal of risk finance Vol. 10; no. 1; pp. 54 - 66
• Main Authors: Seth, Rajiv, Ansari, Valeed A., Datta, Manipadma
• Format: Journal Article
• Language: English
• Published: Emerald Group Publishing Limited 02.01.2009
• Subjects: Agriculture; Derivatives markets; India; Risk assessment
• ISSN: 1526-5943
• DOI: 10.1108/15265940910924490

Purpose Small farmers in developing countries have very little means of managing the weatherrisk to their agricultural produce. Weather derivatives could provide a solution, but the demand for such instruments and the willingness to invest in them needs to be researched. The purpose of this paper is to assess weatherrisk hedging by farmers, focusing on the willingness to pay in Rajasthan, India. Designmethodologyapproach The paper presents results of a contingent valuation study done on the findings of a survey carried out in six villages in the state of Rajasthan. The survey was done on over 500 farmers after explaining the concept of weather derivatives and how they would work to help them hedge their weatherrelated yield risk. The survey included questions on factors, which could have a bearing on the farmers' willingness to pay, and a bidding game where responses were solicited to premiums in a hypothetical market. Probit and logit models are used to determine probabilities of Yes responses to various bids and the mean willingnesstopay. Findings The paper brings out a model, which uses nine independent variables affecting the probability of a farmer saying Yes to a price quoted to him for a weather derivative. Using the results from the probit and logit models, the farmers' mean willingnesstopay is determined to be around 8.8 per cent of the maximum possible payout of a weather derivative contract. Originalityvalue With weather derivatives being accepted as a means of risk management for agriculture in developing countries, the willingnesstopay figures determined in this paper would provide an insight to the structuring and pricing of weather derivatives, especially in developing countries.