Abstract
M.Com. (Financial Management)
This paper investigates the use of weather derivatives in the maize production industry of South Africa. The history, users and mechanics of weather derivatives and maize production are presented in the study. This study examines, by using experiential design, the potential revenue for a control and a test group of farmers using monthly, actual maize production and weather observations for the period 2000 - 2010. This study suggests, with reference to the results, an option strategy that ultimately results in the hedging of maize output risk for the farms investigated. Limitations of the study are basis risk, liquidity, the difficulties in pricing of the weather derivative and finally the reticence of agricultural business to explore these hedging instruments in practise. In conclusion the study presents suggestions for further research into the wider application of weather derivatives into other industries, the exploration of the effects of weather on changes in crop yield and the effects of a hybrid maize crop and its possible resilience to weather changes. This study also demonstrates the weather effects on maize output and suggests a hedging solution to yield.