The weather has a significant influence on yield fluctuations in Nepal, particularly for grains. This study examined the effect of seasonal precipitation, maximum and minimum temperatures and extreme climatic variables on yield levels and variability of rice, maize and wheat yields. The authors applied a stochastic production function approach as suggested by Just-Pope for panel data at the district level. The estimation results indicated that climate trends in Nepal had a significant influence on crop yield levels and variances in various magnitudes and directions. The results showed an increase in precipitation negatively influenced maize yield levels and positively influenced wheat yield levels; however, a positive influence was found to reduce yield variability in rice and wheat. Similarly, an increase in maximum temperature apparently led to decreased maize and increased wheat yield levels, respectively, and also led to increased yield variability in rice and maize. Likewise, the minimum temperature was helpful to increase yield levels for all crops and to decrease the yield variability in rice and maize. Moreover, the extreme climates such as low precipitation and high maximum temperatures significantly influenced the reduction in yield levels of rice and maize, respectively that could be used to design an index insurance product for Nepal.