Weather Derivatives in the Wine Industry

Abstract

The wine industry is very sensitive to climate risk, mainly due to the grape crop. Industry players usually cover this risk through single-peril and multi-peril crop insurance policies. Insurance policies pose many problems of efficiency, as pointed out in the literature, and do not usually cover the temperature risk. The aim of this paper is to understand whether weather derivatives, mainly developed for the energy industry, can also be useful to cover temperature risk for the wine industry. I have discovered that a weather derivative useful for this task is similar to a cooling degree day (CDD) contract in the energy industry, and that a possible hedging strategy is a straddle consisting of combination of a call and a put on a suitable temperature index. In the case history presented, relating to the DOC Oltrep-Pavese (OP) Bonarda red grape, the straddle covers the temperature risk effectively, although it is unable to reduce volatility related to the crop economic value.

Keywords: weather derivatives, temperature risk, corporate risk management, wine industry

JEL Classification: G20, G30, L66, M10