RISK MANAGEMENT IN PLANT PRODUCTION WITH WEATHER DERIVATIVES

It has been long known that weather conditions are the main factor of uncertainty in plant production. For this reason, an integrated system of risk management in plant production is necessary today in order to somewhat compensate for the loss caused by weather risks. In the past, farmers have bought insurance for protection against fluctuations in crop yields caused by weather risks. Relatively new tools for risk management in plant production are weather derivatives. Although weather derivatives show many advantages over traditional insurance the market for these products is still relatively limited. Therefore, it is necessary to quantify the effect of risk reduction that can be achieved by using weather derivatives on the example of selected farm in Germany. If the field of production is close to the meteorological station, and if a high correlation between weather indices and yield is assumed, then the effect of risk reduction is significant (up to 40 %).