Efficiency of Weather Derivatives as Primary Crop Insurance Instruments

This study analyzes efficiency of weather derivatives as primary insurance instru-ments for six crop reporting districts that are among the largest producers of corn, cotton, and soybeans in the United States. Specific weather derivatives are con-structed for each cropldistrict combination based on analysis of several econometric models. The performance of the designed weather derivatives is then analyzed both in- and out-of-sample. The primary findings suggest that the optimal structure of weather derivatives varies widely across crops and regions, as does the risk-reducing performance of the optimally designed weather derivatives. Further, optimal weather derivatives required rather complicated combinations of weather variables to achieve reasonable fits between weather and yield. Key words: agricultural risk management, crop insurance, index insurance, weather derivative