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Rainfall index insurance for corn farmers in Shandong based on high-resolution weather and yield data

Author

Listed:
  • Wen Chen
  • Roman Hohl
  • Lee Kong Tiong

Abstract

Purpose - The purpose of this paper is to present the development of cumulative rainfall deficit (CRD) indices for corn in Shandong Province, China, based on high-resolution weather (county, 1980-2011) and yield data (township, 1989-2010) for five counties in Tai’an prefecture. Design/methodology/approach - A survey with farming households is undertaken to obtain local corn prices and production costs to compute the sum insured. CRD indices are developed for five corn-growth phases. Rainfall is spatially interpolated to derive indices for areas that are outside a 25 km radius from weather stations. To lower basis risk, triggers and exits of the payout functions are statistically determined rather than relying on water requirement levels. Findings - The results show that rainfall deficits in the main corn-growth phases explain yield reductions to a satisfying degree, except for the emergence phase. Correlation coefficients between payouts of the CRD indices and yield reductions reach 0.86-0.96 and underline the performance of the indices with low basis risk. The exception is SA-Xintai (correlation 0.71) where a total rainfall deficit index performs better (0.87). Risk premium rates range from 5.6 percent (Daiyue) to 12.2 percent (SA-Xintai) and adequately reflect the drought risk. Originality/value - This paper suggests that rainfall deficit indices can be used in the future to complement existing indemnity-based insurance products that do not cover drought for corn in Shandong or for CRD indices to operate as a new insurance product.

Suggested Citation

  • Wen Chen & Roman Hohl & Lee Kong Tiong, 2017. "Rainfall index insurance for corn farmers in Shandong based on high-resolution weather and yield data," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 77(2), pages 337-354, July.
    • Handle: RePEc:eme:afrpps:afr-10-2015-0042
    DOI: 10.1108/AFR-10-2015-0042
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    Citations

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    Cited by:

    1. Zed Zulkafli & Farrah Melissa Muharam & Nurfarhana Raffar & Amirparsa Jajarmizadeh & Mukhtar Jibril Abdi & Balqis Mohamed Rehan & Khairudin Nurulhuda, 2021. "Contrasting Influences of Seasonal and Intra-Seasonal Hydroclimatic Variabilities on the Irrigated Rice Paddies of Northern Peninsular Malaysia for Weather Index Insurance Design," Sustainability, MDPI, vol. 13(9), pages 1-23, May.
    2. Eric Le Fur & J. François Outreville, 2021. "Real Options and Reduction of Basic Risk of Index‐Based Climate Agricultural Insurance," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(4), pages 1658-1671, December.

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