Potential use of weather derivatives in hedging aggregate viticulture yields: An analysis of the Niagara region of Canada

Abstract

Although potentially useful for financially hedging systemic weather-related risks, weather contracts/derivatives (also referred to as parametric insurance) have not seen wide adoption in agriculture outside of applications in developing countries, frequently supported by governments and non-governmental organizations (NGOs). A significant impediment is the lack of financial firms willing to stand ready to sell weather derivatives to individual agricultural producers in the over-the-counter market who, due to the localized nature of weather, face idiosyncratic weather-related risks. In particular, the administrative and reinsurance costs of supplying relatively small contracts with specific terms to many different producers are often prohibitive. The current study considers the potential use of weather derivatives in hedging the aggregate yield/revenues of viticulture producers represented by an industry association located in the province of Ontario, Canada. We examine the sensitivity of aggregate industry yields to several relevant weather-related risks employing copula function analysis. We then consider the potential of a weather derivative in hedging the financial risk associated with cold winter temperatures, which pose the greatest risk to aggregate vinifera yields. The issue of attributing costs and payouts to individual association members remains unresolved, and several alternatives are suggested.

Spatial integration and hierarchy in Old-World wine markets: The role of the 2013 CAP reform

“…Furthermore, time-varying nonparametric copulas are applied in Fousekis, Emmanouilides, and Grigoriadis (2017), exploring spatial price interrelations in the skim milk powder markets of Oceania, the EU, and the United States. Finally, studies employing copula models in a wine economics context include those of Cyr, Kwong, and Sun (2017), assessing the dependence structure between Parker's ratings and Bordeaux en primeur wine prices; Cyr, Kwong, and Sun (2019) investigating the relationship between the ratings of prominent en primeur wine critics and those of Parker; and Cyr, Kushner, and Zhang (2023) exploring the sensitivity of aggregate grape yields to various bioclimatic indices, which represent major viticulture risks, in order to hedge a weather-related risk and provide weather-derivative contracts for the association of Grape Growers of Ontario, Canada.…”