First, we have been the first agricultural economists to provide a publicly available tool to measure weather risk management. WWW.WEATHERWIZARD.US can evaluate weather risk and calculate insurance at any weather station in the United States. On price risk we were the first to examine risks using wavelettes (subfrequencies of price variability), develop limit boundaries on the Hurst ratio (variance ratio), and calculate options on the cash commodity including the market price of risk. We have evaluated basis risk in weather across the United States, have priced out risk contingent credit, developed weather contingent famine bonds for Africa, and priced commodity linked credit in India.
impact statement issue
The main issue is the balancing between business and financial risk. Adverse price movements or weather events increase financial risks for farmers. These business risks limit the amount of credit available, which in turn limits investment. By imbedding risk contingencies within a credit product, default risk is minimized or eliminated. This will increase the supply of credit to farmers.
impact statement response
The first step is to define the business risks facing farmers. We have developed techniques for evaluating price risks and designing options on cash commodities. On the weather side we have expanded our program at www.weatherwizard.us to include regional weather risk and joint weather risk and to calculate weather risk insurance. We have developed the mathematical formulas to calculate the interest rates charged on risk contingent credit (bonds, farm mortgages, and farm operating credit).
impact statement summary
This project is investigating the use of commodity price and weather-risk contingent credit. The essence of these new financial products is that the repayment is protected by insurance against adverse price movements or adverse weather (heat and/or precipitation) events. The insurance is imbedded in the newly designed credit instrument.
