The possibility of drought risk reduction in corn production.

Abstract

Weather derivatives are contemporary instruments for insurance risk of drought in agricultural production. Corn production is particularly sensitive to this risk, and the amount of the yield of this crop is in significant correlation with the July-August rainfall amount. Oscillations of production output, caused by the risk of drought, are reflected directly on the fluctuations of the financial result. The application of weather derivatives may decrease the variability of the mentioned economic parameter in corn production. In the investigated example of corn production, simulating the application of the weather option the coefficient of variation of realized financial results decreased by 9.64% compared to the version without the insured risk. At the same time, using the analysed insurance instrument, the risk of achieving a negative financial result is eliminated.