Agricultural Risk Management Based On Weather Derivatives

In our country, agriculture is a basic industry of one state deciding our national survival and development. But agricultural production is directly exposed to the natural environment, influenced notable by climate and weather. The process of agricultural production is faced with many natural hazards such as drought, floods, and frost. In this paper, we use the date of 17 cities’ s wheat production and climate in Climate Production Model(CDC) to analy the relationship between production and climatic factors of winter wheat in Shandong Province. Studies show that weather factors are the important factors in wheat production, and we find that the cumulative rainfall has positive impact on wheat production. The coefficient of rainfall factors on the yield factor is 0.029, in other word, if the quantity of rainfall increase 1%, the wheat yields will increase 0.029%, which is the foundation in the design of put options based on the cumulative rainfall. Take Jinan City for example, were analyzed the rainfall data of 1980-2014, a total of 35 years, testing the series’ stability and randomness, and build the ARMA model to forecast the rainfall.we also price this put options in three ways, including pricing under the contract for payment of historical sites analysis, distribution analysis method as well as the pricing under the Monte Carlo simulation. Finally, we analyze the effect of the put options based on rainfall, which showed that the options can hedge the loss because of the lack of rainfall.