EVALUATING RAINFALL INDEX AS AN EFFECTIVE HEDGE FOR PEPPER PRICE RISK: A QUANTITATIVE ANALYSIS

Abstract

Pepper, one of the most traded spices globally, is highly vulnerable to price swings caused by weather disruptions, particularly erratic rainfall. Farmers and traders often struggle to manage this risk due to limited access to traditional hedging tools like futures contracts. In recent years, index-based weather derivatives have gained attention as potential alternatives. However, their effectiveness in stabilizing pepper prices remains underexplored.

This study examines whether rainfall index can serve as a reliable hedge against pepper price volatility. Using historical data of pepper prices from major pepper-producing regions in India, we analyze the correlation between rainfall deviations and price fluctuations. Regression-based hedging models are applied to determine optimal risk reduction strategies.

Our findings aim to assist farmers, agribusinesses, and policymakers in adopting low-cost, accessible risk management tools tailored to climate-sensitive crops like pepper. If successful, rainfall-indexed hedging could revolutionize financial resilience in spice-dependent economies, reducing reliance on volatile global markets.