Study highlights effect of drought on farmers' bottom line

A new study has found droughts not only lead to a fall in output and profit for New Zealand livestock farmers but also an increase in current loans.

The study by Motu Research - one of the first of its kind - linked financial, agricultural and productivity data with historical weather data. 

Researchers investigated the impacts of droughts on farm-level economies as well as the resilience of farmers to droughts.

Although some of the findings were unsurprising, "not all the results were what we expected," said Levente Timar, one of the authors of the research paper.

"For example, we expected intermediate expenditure to rise as part of dairy farmers' drought response due to increased spending on supplementary feed, but that wasn't what we discovered," he said.

"In the case of dairy farmers our results could suggest that they may be able to reduce other components of expenditure, although this response is not fully explained in our model."

For the average beef and sheep farm, the study found, an increase in drought intensity leads to reductions in gross output and immediate expenditure. Profits are not significantly affected because as there is falling gross output farmers also reduce their spending. The study also found current loans for sheep and beef farmers are unaffected by droughts.

The authors said there was some evidence that larger farms' profits are less severely affected in droughts, but overall, "few of the farm characteristics affect drought outcomes strongly and systematically".

"It is possible that farmers' psychological, social and demographic attributes play a larger role in creating resilience to droughts than do farm characteristics per se."

The study estimated that for the average dairy farm "a 1 percent increase in drought intensity - corresponding to a 2mm shortfall in precipitation or, roughly, half a day of reduced plant growth - causes $194 decrease in gross output, a (relatively large) $6.65 fall in net profit per hectare, a $152 increase in current loans and an $81 decrease in intermediate expenditure".