Climate Change and the Potential Use of Weather Derivatives to Hedge Vineyard Harvest Rainfall Risk in the Niagara Region

Abstract

The widespread recognition of current and impending climate change has led to the examination of possible impacts and potential adaptation strategies to deal with the prediction of increased variability of weather. Viticulture in particular faces a myriad of weather-related risks that could increase significantly with climate change. In addition to changes in agricultural practices, the use of financial solutions must also be sought in order to deal with the impending economic risks. Weather derivative contracts are a growing market that provide for the hedging of many of the financial risks due to weather. Although their use is widespread and increasing, their adoption by the agricultural sector, including viticulture, has been relatively slow. Using the Niagara region of Canada, we provide an example of how a weather contract can be designed to hedge the financial risk of a critical weather-risk factor common in viticulture, that of excessive rainfall during the harvest season. The variability of rainfall in the Northern Hemisphere has been predicted to increase with climate change and if weather-related risks intensify, weather contracts could prove to be useful tools for the viticulture industry.