Design and use of weather derivatives for farmers: the case of hedging rain risk by soyabean growers in Jhalawar district in India

In the absence of a market for weather derivatives in India, the paper discusses a hypothetical market, and how a contract could be structured when weather derivative trading is introduced. A survey was conducted in six villages in two districts in the state of Rajasthan in order to assess the inclination of small farmers to use weather derivatives to hedge yield risk and to determine their willingness to pay. The findings of the amount that the farmers would be willing to pay are used in this paper. The need of the hour is to have a simple method for determining the price of an option on a rainfall index, so that a possible contract is feasible both for the seller as well as for the buyer. This is brought out in the paper using the case of soyabean growers in Jhalawar district.