Weather Derivatives: A Guide for Farmers and Businesses

1. What are Weather Derivatives in Simple Terms?

Weather derivatives are financial instruments designed to protect farmers and businesses from unexpected weather conditions — such as too little rain, extreme heat, or an early cold wave. If the weather behaves unfavorably and affects income, these derivatives provide compensation to offset part of the loss.

Example:

A cotton farmer in Telangana expects 100 mm of rainfall in July. If actual rainfall is less than 60 mm, the derivative provides a payout to help cover his losses.

2. How Are Weather Derivatives Different from Insurance?

• Insurance pays after verifying actual damage, such as crop loss or flood damage.
• Derivatives pay automatically based on weather data (e.g., rainfall or temperature levels), without needing proof of damage.

Example:

A tomato processing company in Karnataka buys a temperature-linked derivative. If the average June temperature exceeds 36°C, the derivative pays out — even if there’s no visible crop damage.

3. How Do Weather Derivatives Work?

They are based on measurable weather parameters such as:

• Rainfall (mm)
• Temperature (°C)
• Snowfall (cm)

The contract specifies: “If rainfall is below or above a set threshold during a certain period, a payout will be made.”

Example:

A hotel chain in Himachal Pradesh buys a snowfall-linked derivative. If snowfall during peak tourist season is less than 50 cm, the company receives a payout.

4. Why Are These Useful to Farmers?

Weather derivatives help farmers secure their income against unpredictable weather patterns. They don’t need to prove crop damage — payouts are triggered purely by recorded weather data.

Example:

A paddy farmer in Odisha uses a rainfall-linked derivative. If August rainfall is 40% below normal, he automatically receives payment — even if his crop remains intact.

5. Who Else Can Use Weather Derivatives?

• Exporters can hedge against weather-related harvest delays.
• Power companies can manage risks from reduced electricity demand during cool summers.
• Banks can link loan repayment schedules with weather-linked payments to reduce defaults.
• Startups and food processors can manage risks from seasonal produce fluctuations.

Example:

A solar energy company in Gujarat buys a sunshine-linked derivative. If sunlight hours fall below the seasonal average for two consecutive months, it receives compensation.

6. Are These Tools Only for Large Companies?

No. Even individual farmers and small cooperatives can access weather derivatives through banks, agri-tech platforms, or local market agents that pool and manage risk collectively.

Example:

A group of grape farmers in Nashik buys a rainfall-linked derivative through an agri-cooperative. If rainfall exceeds the set limit during harvest season (risking spoilage), they receive compensation.

7. How Is Weather Data Tracked?

Weather data used for derivative settlements comes from credible sources such as:

• Indian Meteorological Department (IMD)
• Certified private weather stations approved by exchanges

This ensures transparency, accuracy, and dispute-free transactions.

8. What Are Some Common Weather Indices Used?

• HDD (Heating Degree Days): For cold weather exposure
• CDD (Cooling Degree Days): For heat-related exposure
• Rainfall deviation: From the normal seasonal average
• Dry/Wet days count: Number of days with or without rainfall

Example:

A beverage company buys a CDD-linked derivative. If the summer turns cooler than expected, reducing beverage sales, the company gets compensated.

9. How Do Weather Derivatives Support Climate Resilience?

• Make agriculture more predictable and financially stable
• Enable timely loan repayments
• Reduce rural distress caused by crop failures
• Promote digital and financial inclusion
• Strengthen long-term disaster preparedness and planning