The Effectiveness of Using Temperature Based Weather Derivatives to Hedge Maize Production in the Free State

This paper investigates the possibility of using temperature based weather derivatives to mitigate the maize crop yield risks induced by the temperature weather variable. The focus area is the Free State province in South Africa and temperature and maize output data was collected for the period 2000-2010. Little is known about the viability of using these instruments in a South African context. The paper makes use of an experimental descriptive design and models a time series analysis that evaluates the performance of a theoretical test and control group of farmers, based on actual data. The test group implemented a derivative hedging strategy against temperature fluctuations. Findings suggest that the use of such derivatives will be an effective strategy in mitigating temperature risks in this region