Analysis On Financial Innovation Path Of Agricultural Weather Risk Management

Global warming, greenhouse gas emissions and how to adapt to climate change are currently hot issues. Climate change and increasingly frequency of extreme weather events will cause changes in agricultural ecological environment, production layout and the structure. They also have serious threat to the long-term stability of agricultural production as well as the resources required to obtain and use, and have serious impact on socio-economic and agricultural production. Agriculture is essential for human survival, which is also highly sensitive to climatic conditions. The survival of the majority of the population in China is heavily dependent on agriculture, is also facing the challenges of the ecological and economic aspects, weather and climate change risks making the problem more severe.Weather risk management can reduce agricultural losses suffered due to weather risk, enhance risk management and production efficiency in agriculture, weaken or eliminate weather risk that agriculture facing, let agriculture obtain stable income in the future, and reduce uncertainty. Although weather risk management is widely used in agriculture, our existing mechanisms and measures for the management and transferring of agricultural weather risk have their deficiencies, which can not meet the urgent needs of agricultural weather risk management. Weather risk management including risk retention, risk control, risk transfer and so on, this article will be based on the analysis of the various methods to point out that financial innovations as risk transfer pathways can effectively manage the agricultural weather risk. Both weather index insurance and weather derivatives are the main innovation tools that can achieve the above functions, which are powerful tools for transferring agricultural weather risk. Combination international advanced and mature practical experience of weather index insurance and derivatives, this paper proposes development strategies in our country based on the view of current development, and uses panel data model and ARMA time series model designed to develop weather index insurance and weather derivatives contracts in line with the actual situation in China.The main contents and conclusions of this study are as follows:First, weather risk is the main risk agricultural production facing. By analysis of the weather risk agriculture facing, we find that agriculture is highly sensitive to weather. Weather risk results in serious loss on agriculture, especially the risk of drought, floods, hail, and low-temperature damage, and so on, which have severe impact on China’s agriculture. This paper uses food production data and climate data of the78counties in Hubei Province from1990to2009, and the uses of economic-climate model (referred to as the C-D-C Model) to analyze the impact of various factors, including climatic factors, on food production in Hubei Province. Research results show that the average temperature, precipitation and sunshine changes each has a maximum impact on food yield in Hubei Province, and the impact is inverted U-shaped structure, which means that grain growth requires a stable temperature, precipitation and sunshine, too high of the temperature, too little precipitation, too high of the sunshine intensity could cause drought. While the temperature is too low will produce frost damage, excessive rainfall may lead to the occurrence of floods, which will have a negative impact on their production. Based on above analysis, this article points out that China is facing more serious weather risk, weather risk in agriculture is also growing, and the demand for agricultural weather risk management has become stronger, but both our weather risk management system and effective way of weather risk management are missing.Second, weather index insurance and weather derivatives are important tools for transferring agricultural weather risk. Based on discussing feasible risk management method, analyzing problems of traditional agricultural insurance, and comparative analysis of weather index insurance and agricultural insurance, we point out that weather index insurance has advantages of less moral hazard, avoiding adverse selection, low management cost, easily binding with other financial products and so on. Weather index insurance is the innovation of agricultural insurance, it can effectively transferring agricultural weather risk. Based on introducing weather derivatives and the underlying index, it shows that agricultural producers and others could be able to use weather derivatives to achieve their climate risk management. Weather index insurance and weather derivatives in nature are financial derivatives, the two complement each other and promote each other, have their own advantages, are important financial innovations in transferring weather riskThird, our weather index insurance has been in the practice stage and weather derivatives market at the exploratory stage. We summed up China’s domestic weather index insurance development, shows that some areas in our country, including Shanghai, Anhui, Zhejiang, Shaanxi, and so on, have began to R&D and pilot. We have a special presentation of the index insurance contracts and pilot of Shanghai watermelon rainy season index insurance, situation of Jiangxi tangerine frost damage index insurance, and point out that with support of the World Food Programme (WFP), the World Bank and other institutions, Anhui rice planting weather index insurance to carry out the first case and Anhui wheat weather index insurance claims. Based on which Shanghai watermelon rainy index insurance, Jiangxi tangerine frost damage index insurance and Anhui rice and wheat weather index insurance practice effect are analyzed. Weather risk market in China has not been established, but China has a certain foundation, with the basic conditions for the development of weather derivatives.Fourth, enlightenment of foreign agricultural weather risk management financial innovation practice and experience. Analysis shows that abroad have widely used weather index insurance and weather derivatives to transfer weather risks, and developed countries develop earlier on the weather index insurance design. Supported by the World Bank, the World Food Programme (WFP) and other agencies, developing countries are carrying out R&D and pilot of the weather index insurance products. Weather derivatives market in foreign countries started earlier and mature. Learning from foreign experiences, weather index insurance in China needs to strengthen development of meteorological technology, development of bancassurance mode and so on. To develop weather derivatives, we can first introduce temperature index in the six cities including Harbin, Beijing, Shanghai, Guangzhou, Wuhan and Dalian, first design temperature index weather derivatives contracts, and first develop exchange-traded, and so on.Fifth, Hubei rice growing season rainfall index insurance contract design. Based on elaborating weather index selection criteria, the main weather variables in weather index insurance, weather index insurance claims triggered principle, as well as basis risk, rice drought index insurance contracts and rice rainstorm disasters index insurance contracts are designed in accordance with the definition of weather index insurance contracts. Selected period during the rice growing season (Hubei Province from March to October), and accumulated rainfall is the weather indicator. Specifically, selecting panel data of Xiaogan, Suizhou, Shiyan, Xiangfan City within their jurisdiction counties to design drought index insurance contracts, and panel data of Jianghan Plain area, Xianning City and its jurisdiction to design rainstorm disasters index insurance contract. Results of the model show that the cumulative precipitation has a positive and significant marginal effect on rice yield in Shiyan, Xiangfan and other arid regions, the cumulative rainfall in10%level of statistical significance, has a significant negative effect on rainstorm concentrated areas including Jianghan Plain, Xianning City and the counties and cities within their jurisdiction.Sixth, the temperature call option contract development in Wuhan City. Based on elaborating weather derivatives related financial products, particularly, sample analysis of the call option, put option, hedging options, swaps, crashed into and knocked options, we select daily temperature data of Wuhan City from January1,1990to December31,2009, and introduce the ARMA time series model to estimate, find that basically there is no serial correlation, coefficients are very significant, and validation of the model estimation results also display the fitting effect of predicted value and the actual value is very good. Further, based on the introduction of the temperature option pricing model, we select GDDs as the underlying index of temperature option, and test the accuracy of the ARMA model, find that value of the rate of deviation and variance rate are very small, and the covariance error rate value very large, this proofs that the model has a good fitting effect. Overall, based on ARMA time series model to analyze the dynamic process of the temperature change in Wuhan City, and the empirical results confirm the model has a better goodness of fit, which could be as a basis for reasonable temperature options products pricing.In this study, the main innovation lies in:Firstly, analysis on financial innovation path of agricultural weather risk on risk management perspective. This paper researches on financial innovative approach of agricultural weather risk management from a risk management perspective, extends and applies financial innovation, which is the mechanism of weather risk transferring, to agricultural weather risk management, in order to provide a new path to circumvent and transfer agricultural weather risk and perfect China’s agricultural weather risk management system.Secondly, analysis of the need for agricultural weather risk management based on the meteorological data and production data. This paper uses meteorological data and relevant production data including20years in78counties of Hubei province, by comprehensive consideration of climatic factors and socio-economic factors, has an empirical analysis of the impact of weather risk on food production, explains the relationship between climate factors and agricultural production, indicating the urgent needs of agricultural weather risk management, and also provides a scientific basis for corresponding decision of the local government.Finally, designing Hubei rice growing season rainfall index insurance contract based on panel data and FGLS estimation, and developing temperature call option based on ARMA time series model in Wuhan City. This paper uses panel data from1990to2009in78cities and counties of Hubei Province, based on the cumulative rainfall to design Hubei rice drought index insurance contract and rice rainstorm disaster index insurance contract, and uses a total of20years daily temperature data (7300) from1990to2009in Wuhan City, based on ARMA time series model to develop temperature call option contract in Wuhan City. These are different from most theoretical aspects of the research in our country, and the empirical research of this paper would improve and supplement the research in this field.The results of this research have certain theoretical and practical significance on improving China’s agricultural weather risk management system, providing effective ways for agricultural weather risk management to meet the risk management needs of China’s agricultural weather, and a wealth of China’s financial markets products, promoting financial engineering innovation, and improving the structure and function of China’s financial markets.