Farm-level responses to weather trends: A structural model

Abstract

Assessing the effects of weather and climate on agricultural production is crucial for designing policies related to climate change adaptation and mitigation. A large body of literature has identified the detrimental effects of climate change on crop yields worldwide, and farm-level adaptation has been shown to mitigate the adverse effects on agricultural production. In this study, we employ a structural model to examine farm production responses to ongoing weather trends. We investigate how farmers adjust output and input decisions by estimating a system of output supply and input demand functions, controlling for nonrandom crop selection. Using panel data with 14,796 observations reflecting 1638 German crop farms (1996–2019), we find that both the expected and realized weather determine farmers' production decisions. In the event of a drought, the supply of most considered crops and the demand for fertilizer decrease. The drought shock has also lasting effects on farmers' production decisions, with a reduced supply of protein crops and an increased level of root crops production in subsequent years. These findings highlight the need to account for farm-level production responses when assessing weather and climate impacts.