Weather Risk Management for Agriculture and Agri-Business in Developing Countries

This chapter has three components. The first part argues that weather risk causes substantial inefficiencies in developing countries; agri-businesses, faced with underdeveloped formal financial markets, have to rely on traditional weather risk management (WRM) that is associated with under-investment and over-diversification. The authors discuss how new WRM can overcome the pitfalls of traditional WRM and have a large development impact. They argue that successful weather risk-sharing arrangements in developing countries would offer potentially huge benefits not just to farmers, but also to agri-business and financial markets. With the advent of effective WRM, finance institutions would be able to collateralise rural credit more efficiently and extend loans to groups of weather-exposed farmers that otherwise would not be bankable.

In the second section, the authors look at the key success factors of new WRM in emerging markets. Five factors are highlighted:

  • Good weather data in key locations
  • The financial intermediaries and their clients
  • Facilitation by development organisations
  • A benign regulatory framework
  • Risk transfer mechanisms into international weather markets

The final part turns to the operational aspects of a new WRM, studying in detail the case of rainfall index insurance for cereals in Morocco. Ultimately, the authors conclude, the emergence of a vibrant weather market will be driven by knowledge transfers to local “champions” who grasp the opportunity, as well as the demonstration effects of a few emerging market transactions and the willingness of global weather risk market makers to shoulder some up-front costs in order to reap the benefits of a globally diversified weather market.

  • Resource type
  • Author Hess, U.; Richter, K.; Stoppa, A.
  • Organisation
  • Year of Publication2002
  • Region
  • LanguageEnglish
  • Number of pages16 pp.
  • EditionClimate Risk and the Weather Market

Related Resources