Climate risk management based on climate modes and indices - the potential in Australian agribusinesses

Abstract

Global and hemispheric climate indicators have proved useful in many countries for characterising intra- and inter-annual variability in climate processes, agricultural output and biomass production. They also form the basis of successful seasonal climate and production prediction systems for the probability distributions of allied parameters such as rainfall or crop yield. Climate risk management via derivative, insurance or bond instruments has only recently incorporated non-local climate parameters such as teleconnection indices in payoff functions and overall design. A feasibility study of using the Southern Oscillation Index in weather derivatives for the Australian wheat industry has suggested several such climate-anomaly indicators as suitable vehicles for managing risks of various types, including the hedging of likely errors in seasonal climate forecasting. The potential benefits should accrue if the co-joining of weather/climate risk management and seasonal forecasting is encouraged across many weather-sensitive industries (e.g. agriculture, mining, energy and tourism), if longer-term perspectives of risk across many seasons are adopted and if support is given to suitable trading mechanisms and industry extension programmes.