World Bank tests water with Malawi drought risk trade

The pilot trade, approximately $3 million in notional size, is expected to be the first in a series intermediated by the institution aimed at enabling developing countries to hedge against weather risk. Indicative prices for the transaction are being gathered from market participants, and the World Bank intends to finalise terms by the end of the month.

The deal will be part-financed by the UK Department for International Development.

“We’ve been working for about a year and a half on the product development for this transaction, which will essentially hedge the government of Malawi against severe and catastrophic drought,” said Julie Dana, Washington-based technical specialist in the World Bank’s agriculture and rural development commodity risk management group.

The trade will be linked to an index based on the average daily rainfall between October and April across 23 individual weather stations in Malawi. The so-called water requirement satisfaction index will be weighted with a bias towards regions that are more important for producing maize, which is the country’s staple crop. Washington-based remote sensing company MDA Federal will act as an independent monitor.

“The government has been using this model since 1992 to do predictions on maize production, so we’ve adapted it slightly and used it as the basis for an index-based derivatives product,” explained Dana.

Malawi’s rainy season is typically between October and April, and its harvest season follows until around the following July. This means that, when drought hits Malawi, the lean period between October and January becomes particularly fraught, Dana said. In such circumstances, this is usually the time when humanitarian help is called for – well after the prices of food imports have already risen.

In contrast, the payout from the weather derivatives trade would come by April or May. “The payout from this instrument provides contingency financing to the government in a new way, because it’s going to be a very timely and predictable payout that would come much earlier in the process,” Dana explained.

The World Bank is now investigating using any payout from the weather derivatives contract to purchase a call option on maize to lock in future prices.

While a premium of around $3 million is unlikely to go far in meeting food shortages caused by drought, Dana said the pilot transaction was partly aimed at exciting interest among counterparties for taking emerging market weather risk.

Malawi last suffered from drought in 2005, a year that brought widespread hunger to many countries in southern Africa.

While the drought risk transaction is a first for the World Bank, it is one in a series of recent deals that have used weather derivatives technology for humanitarian purposes.

See also: Eyes on the storm
Weather derivatives help fulfil Millennium Promise
A forecast for change

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

2021 brings big changes to the carbon market landscape

ZE PowerGroup Inc. explores how newly launched emissions trading systems, recently established task forces, upcoming initiatives and the new US President, Joe Biden, and his administration can further the drive towards tackling the climate crisis

Energy25 winners in review

Energy25 aims to capture, define and analyse an important period in the development of energy markets, providing an invaluable yardstick for all participants. More broadly, it represents the latest stage in the strategy of defining, researching and…

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here