Predicting the yield of spring wheat by weather indices in Finland: implications for designing weather index insurances

Abstract

This paper quantifies the spring wheat yield conditional on temperature- and rainfall-based weather indices in Finland. The estimating equations are standardized and simplified so that they provide information for designing tradable contracts. A simple basket of weather indices, consisting of growing degree days, night frost and rainfall measures, has the potential to hedge about 38% of the wheat grower yield risk, with the remaining 62% being left as uninsured basis risk. Our results have several important implications for the design of simple and tractable weather index-based insurance contracts. The data suggest that the marginal products of weather events have a large variation across time and they are the most significant within certain critical time periods. Therefore, the weather events triggering the indemnity payments should be bounded within certain critical time regimes over their distribution along the growing season.