Dairy farms confront unique risks from weather conditions. Hot and humid weather induces heat stress, which brings a series of risks to dairy farm operations including reductions in milk production and pregnancy rate and increases in cull rate and death rate. Traditional heat abatement technologies control the environment through ventilation, misting or evaporative cooling. Adoption of abatement equipment, however, is hindered by its high initial cost and possibly long payback period, especially for small- and medium-scale firms. Weather derivatives provide an alternative method of risk management for dairy producers. Instead of reducing production losses, weather derivatives make payments based upon observed weather conditions over a period of time so that they offer the potential to offset profit losses caused by adverse weather events. Chapter 2 tests the risk management value of weather derivatives acting as a substitute for traditional abatement technologies within a utility maximization framework. Previous research has identified the problem of basis risk in weather derivatives. Little theoretical or empirical work has been done to examine the effect of basis risk on weather derivatives. Chapter 3 examines the effect of basis risk in weather derivatives, and whether the existence of basis risk mitigates the usefulness of weather derivatives for dairy risk management. A decision that must regularly be made by a dairy farmer is when to maintain his abatement equipment and when to replace it. This decision affects both current and expected future revenues. Considering that weather derivatives can be purchased periodically, Chapter 4 tests the risk management value of weather derivatives for dairy producers and examines how weather derivatives can affect dairy producers' abatement equipment decisions. In this chapter, I employ a dynamic programming framework to study the case that a representative dairy farmer maximizes his long-run utility using weather derivatives and abatement equipment.
|School:||The Ohio State University|
|Department:||Agricultural, Environmental and Development Economics|
|School Location:||United States -- Ohio|
|Source:||DAI-A 79/09(E), Dissertation Abstracts International|
|Keywords:||Abatement equipment, Profit, Weather, Weather derivatives, Weather options|
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