(Yicai Global) March 15 -- The government of southern Guangdong province is supporting the Guangzhou Futures Exchange to develop weather futures, which help businesses such as farming and renewable energy hedge against losses caused by unexpected changes in the weather pattern.

The local government will also help to set up research institutes for the investment in and financing of weather derivatives, it said yesterday.

Although overseas commodities markets started to introduce weather-related derivatives back in the 1990s targeting climate change, rainfall patterns and extreme weather, China has yet to introduce the trading of weather futures.

However, as more industries become weather-sensitive, such as new energy, tourism, retail and agriculture, the need to hedge against weather exposure is rising.

Other commodity exchanges in the country have already expressed an interest in weather futures. Both Zhengzhou Commodity Exchange and Dalian Commodity Exchange have said they will start compiling weather indexes and begin to explore weather-related derivatives.

Weather futures share the same trading principle as commodities such as crude oil, cotton and white sugar, an executive at the Zhengzhou Commodity Exchange told Yicai Global. But weather futures are also an innovative derivative, which adopt the transaction form of futures but take various weather variables as trading targets.

Farmers, for instance, can buy weather futures tied to temperature indexes if they are concerned that their grain output will be affected if there are several days of extreme heat, a manager at the Dalian Commodity Exchange said. In this way they can receive compensation once they sell their futures which will help protect them to some degree against a drop in output caused by scorching heat.

Editors: Liao Shumin, Kim Taylor