Weather derivatives as a risk management tool for maize farmers in South Africa

Author(s):
J de Necker, JM Geyser, and AM Pretorius

Article history:
Received: 28 November, 2022
Accepted: 09 October, 2023

Abstract:

The study investigates the potential of weather derivatives to mitigate agricultural risk factors. Specifically, it examines the feasibility of rainfall options as a risk management tool in hedging yield risk for maize farmers in the North-Western Free State province of South Africa. The correlation between rainfall and crop yield is established by examining data on maize yield over a 20-year period. Results indicate that rainfall during January and February has the most significant impact on maize production. By using a Yield-at-Risk analysis, the study determines that a minimum rainfall level of 135mm during January and February is needed to ensure a good crop. The results show that rainfall options can be financially viable in South Africa, particularly in the water table region of the North-Western Free State. Although the study admits that farming profitability may not significantly improve, it shows that downside risk can be limited while still achieving a 30% profit on input costs, as offered by the region.

Keywords:
Weather Derivatives, Maize, Rainfall Options, Yield Risk, Crop Insurance, South Africa


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