Droughts and Farms' Financial Performance in New Zealand: A Micro Farm-Level Study

27 Pages Posted: 14 May 2019

See all articles by Farnaz Pourzand

Farnaz Pourzand

Victoria University of Wellington - School of Economics and Finance

Ilan Noy

Victoria University of Wellington

Yigit Saglam

Victoria University of Wellington

Date Written: 2019

Abstract

We quantify the impacts of droughts in New Zealand on the profitability of dairy, and sheep and beef farms. Using a comprehensive administrative database of all businesses in New Zealand, we investigate the impact of droughts on farm revenue, profits, return on capital, business equity, debt to income ratio, and interest coverage ratio. Over the period we examine (2007-2016) about half of the districts experienced severe droughts, and almost 85% of districts were affected by more moderate droughts at least once. For dairy farms, there is a strong negative relationship between the occurrence of droughts two years earlier and farms’ revenue, profit and consequently their return on capital. More surprisingly, we found that current (same fiscal year) drought events have positive impacts on dairy farms’ revenue and profit; this effect is most likely attributable to drought-induced increases in the price of milk solids (New Zealand is the market maker in this global market). In general, dairy farmers ‘benefit’ more from drought events when compared to sheep/beef farms, whereas the latter sector has less impact on global prices. These findings are useful for shaping climate-change adaptation as there is a clear variation in the future climate-change projections of drought intensities and frequencies for different regions in New Zealand.

Keywords: drought, profitability, dairy, sheep/beef farming, New Zealand

JEL Classification: Q120, Q540

Suggested Citation

Pourzand, Farnaz and Noy, Ilan and Saglam, Yigit, Droughts and Farms' Financial Performance in New Zealand: A Micro Farm-Level Study (2019). CESifo Working Paper No. 7633, Available at SSRN: https://ssrn.com/abstract=3387669

Farnaz Pourzand (Contact Author)

Victoria University of Wellington - School of Economics and Finance ( email )

PO Box 600
Wellington, 6140
New Zealand

Ilan Noy

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Yigit Saglam

Victoria University of Wellington ( email )

P.O. Box 600
Wellington 6011
New Zealand

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