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http://dx.doi.org/10.11625/KJOA.2020.28.4.459

Analysis of Farm Management Stabilization Effects Using Weather Derivatives for Apple Farmers in Kyeongpuk District  

Yun, Sung-Wuk (부산대학교 일반대학원 식품자원경제학과)
Choi, Jang-Hoon (보험연구원 생명.연금연구실)
Chung, Won-Ho (부산대학교 식품자원경제학과)
Publication Information
Korean Journal of Organic Agriculture / v.28, no.4, 2020 , pp. 459-475 More about this Journal
Abstract
This study analyzes weather derivatives as an alternative risk management tool to stabilize farm revenue to complement the existing crop insurance program which suffers from asymmetric information problems such as adverse selection, moral hazard, and verifiability. We estimated apple yield functions to observe the relationship between yields and weather indices such as temperature and precipitation. Based on the estimated yield functions we designed weather futures and options products underlying temperature and precipitation, and calculated the prices of futures and options by two different approaches, historical distribution and Monte Carlo simulation. We found that weather futures and options stabilize farm revenue based on the estimated four risk indicators: Coefficient of Variation, Value at Risk, Certainty Equivalence, and Risk Premium. As a result, weather derivatives could be considered as a potential farm risk management tool through studying more in legal and institutional strategies and developing various derivatives products.
Keywords
farm revenue stabilization; futures; Monte Carlo simulation; options; risk management; weather derivatives;
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