Download Effects of Drought on Farm Revenue: Eleven Western U.S. States

Effects of drought on farm revenue: Eleven Western US States
Ballav Aryal, Washington State University
The World Economic Forum’s Global Risk Report 2016 ranked water crises as the top ‘global risk of highest
concern’ for the next 10 years. At the press conference after the report release, Cecilia Reyes, chief risk officer of
one of the report contributors - Zurich Insurance Group, said that “Climate change is exacerbating more risks than
ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and
increased security risks,”. Echoing that alarm, a recent survey of economic experts on climate change (Howard and
Sylvan, 2015) found that climate change will begin to have or is already having a net negative impact on the global
growth. A majority (94%) of the respondents predicted negative impacts on agriculture. However, Deschesnes and
Greenstone (2007) measured the economic impact of climate change on US agriculture using USDA county level
data on crop production and found that climate change increased farm profits by 4% annually. Goal The goal of
this study is to investigate the relationship between drought and the contribution that farming makes to an
economy. The conventional narrative of drought’s disastrous effects on the farm economy is flawed by ignoring
price elasticity effects. Drought cuts crop production but when crop demand is inelastic enough, the drop in output
can be more than offset by the increase in crop price. A cursory look at farm GDP and drought shows negative
correlation between farm GDP and drought in California. In fact, the correlation coefficient between farm GDP and
drought is negative in eight of the eleven Western states indicating that as drought increases, GDP increases. We
will further examine the relationship between drought severity and agricultural economic outcomes for the eleven
western states.