Don Cyr

Canadian Ice Wine Production: A Case for the Use of Weather Derivatives

Weather derivatives are a relatively new form of financial security that can provide firms with the ability to hedge against the impact of weather related risks to their activities. Participants in the energy industry have employed standardized weather contracts trading on organized exchanges since 1999 and the interest in non-standardized contracts for specialized weather related risks is growing at an increasing rate. The purpose of this paper is to examine the potential use of weather derivatives to hedge against temperature related risks in Canadian ice wine production. Specifically we examine historical data for the Niagara region of the province of Ontario, Canada, the largest icewine producing region of the world, to determine an appropriate underlying variable for the design of an option contact that could be employed by icewine producers. Employing monte carlo simulation we derive a range of benchmark option values based upon varying assumptions regarding the stochastic process for an underlying temperature variable. The results show that such option contracts can provide valuable hedging opportunities for producers, given the historical seasonal temperature variations in the region. (JEL Classification: G13, G32, Q14, Q51, Q54)

Climate Change and the Potential Use of Weather Derivatives to Hedge Vineyard Harvest Rainfall Risk in the Niagara Region

The widespread recognition of current and impending climate change has led to the examination of possible impacts and potential adaptation strategies to deal with the prediction of increased variability of weather. Viticulture in particular faces a myriad of weather-related risks that could increase significantly with climate change. In addition to changes in agricultural practices, the use of financial solutions must also be sought in order to deal with the impending economic risks. Weather derivative contracts are a growing market that provide for the hedging of many of the financial risks due to weather. Although their use is widespread and increasing, their adoption by the agricultural sector, including viticulture, has been relatively slow. Using the Niagara region of Canada, we provide an example of how a weather contract can be designed to hedge the financial risk of a critical weather-risk factor common in viticulture, that of excessive rainfall during the harvest season. The variability of rainfall in the Northern Hemisphere has been predicted to increase with climate change and if weather-related risks intensify, weather contracts could prove to be useful tools for the viticulture industry.

Hedging Adverse Bioclimatic Conditions Employing a Short Condor Position

Weather derivatives are a relatively new form of financial security, providing firms with the ability to hedge the impact of weather related risks to their activities. Participants in the energy industry have employed standardized temperature contracts trading on organized exchanges since 1999, and the availability and use of non-standardized contracts designed for specialized weather related risks is growing dramatically. The primary goal of this paper is to consider the potential design and use of a weather contract to hedge the risks faced in viticulture as measured by bioclimatic indices. Specifically we examine the Winkler and Huglin bioclimatic indices over a 43 year period for the Niagara region of Ontario, Canadas largest wine producing region, and identify a mixed jump diffusion stochastic process for cumulative growing season index values. We then employ Monte Carlo simulation to derive a range of benchmark prices for a “short condor” contract employing the Huglin index as the underlying variable. The results show that valuable hedging opportunities can be provided by such contracts. (JEL Classification: G13, G32, Q14, Q51, Q54)

The potential use of weather derivatives in the viticulture industry.

The increasing availability of specialized weather contracts represents an interesting opportunity for many producers to hedge the significant risks they may face due to adverse weather conditions. In this paper we have considered some of the major production risk factors due to weather, faced by the viticulture industry, and the potential weather contracts that could be employed to mitigate losses. Other important applications of weather contracts also exist in the marketing and tourism side of the viticulture industry. Sales at the cellar door for example may be reduced by adverse weather conditions over the typical wine tourism season. Again weather contracts can be useful in mitigating such losses in revenue. Finally recent studies of the impact of global warming indicate that weather conditions will be difficult to predict and will be associated with greater volatility in the future, making the use of weather contracts all the more valuable.

The size distribution of California's north coast wineries: 1984‐2009

Purpose – The purpose of the paper is to examine the structure of Californias north coast wine industry from 1984 to 2009, to determine if there are significant changes in the size distribution of wineries.Design/methodology/approach – Chi‐squared tests in conjunction with the Hoelter index are used to determine whether the changes in the market share for various size classes are significant.Findings – The authors find a statistically significant trend in terms of smaller wineries becoming an increasing percentage of the total number of wineries and of market share.Originality/value – Unlike most other industries, small wineries are able to meet the changing market and technological conditions of the industry. These results augur well for the growing area of wine tourism which is highly dependent on boutique wineries. The results are also encouraging to new start up wineries considering entering the industry.

The Relationship Between Learning Styles and the Effectiveness of VSC Modules in Finance Education

The advent of tablet PCs and electronic ink, combined with video screen capture (VSC) software, provides for an easy and cost-effective recording of both visual and auditory components of the development of a mathematical concept, with very simple technological requirements. The resulting learning module, in addition to providing an oral exposition in real time, can be stopped, started and replayed at any point, providing the learner with the ability to engage the material at a time and speed of their choosing. Given the multiple modalities of learning that VSC modules encapsulate, the question arises as to whether the predominant learning style of a course participant impacts the perceived and actual value of the technology. Employing students from an introductory MBA finance course, the reported use and perceived value of VSC modules, along with actual examination performance, are studied within the context of international versus domestic students, as well as primary learning styles. The results indicate that, possibly due to a lack of familiarity with the language of instruction, international students place less value on in-class instruction and report higher use of the modules. In addition, linguistic and interpersonal learners appear to report greater usage of the modules and higher perceived value, respectively. Although further study is warranted, the results appear to indicate that a significant benefit of VSC modules, for instructing mathematical topics, is in the accompanying synchronous verbal exposition.

What is Making Investment in the Texas Vineyard Industry Tick? A Real Options Analysis of Entry and Exit

The Texas wine industry of the United States has experienced substantial growth in recent years and yet is constrained by a significant lack of supply of Texas grown grapes. Using a real options framework we examine the role that wine grape price uncertainty plays on the financial decision to invest in vineyard operations in the state of Texas. Given reasonable estimates of required rates of returns, investment and operating costs for typical Texas vineyards, it is found that grape price uncertainty results in a delay in investment and subsequently a lack of grape supply. This delay in investment, known as hysteresis, is often found in situations involving large fixed investments combined with uncertain returns. In general the results indicate that average prices for Texas grapes would have to increase by 30 to 40 percent in order for a significant expansion in Texas vineyards to take place. (JEL Classification: Q120, Q140, G310, D920)