Weather-based instruments in the context of whole farm risk management

Recent and presumable future developments tend to increase the risks associated with farming activities. These include climate risks which have always played an important role in farming. Weather based instruments can be valuable tools to reduce the risk associate with unfavourable climatic events. However, a number of factors can limit the hedging effectiveness of these tools. These factors include basis risk, the impacts of remaining price uncertainty and diversification effects. The paper addresses the influence of each of these factors. In its final part an integrated approach for a comprehensive assessment of weather derivatives and other hedging instruments is proposed that is based on the concept of portfolio optimisation.