Weather derivatives in the wine industry

Purpose - The wine industry is very sensitive to climate risk, mainly due to the grape crop. The aim of this paper is to understand whether weather derivatives (WDs), mainly developed for the energy industry, can also be useful to cover climate risk for the wine industry. Design/methodology/approach - The work is based on both literature review and the development of a suitable hedging strategy, using WDs, to reduce volatility affecting crop economic results. Findings - A WD discovered to be useful for this task is similar to a cooling degree day (CDD) contract in the energy industry, and a possible hedging strategy is a strangle consisting of combination of a call and a put on a suitable climate index. In the case history presented, relating to the Bourgogne Cote de Nuits Pinot Noir red grape, the strangle covers the climate risk effectively, because it is able to reduce volatility related to the crop economic value. Research limitations/implications - Even if single fields are not still enough to evaluate whether a WD's hedging strategy is effective or not, implications affect both supply and demand for hedging instruments. On the demand side, the wine industry could rely on hedging strategies different from insurance policies. In particular, WDs offer to wine makers more flexibility and transparency in selling climate risks to counterparts. On the supply side, the financial industry could overcome limits related to insurance policies which pose many problems of efficiency, as pointed out in the literature, and do not usually cover the temperature risk. Originality/value - The paper is a comprehensive work about the possibility of developing WDs for the wine industry.