Regional differences in the effects of drought events on farm profitability in New Zealand

ABSTRACT This paper estimates the regional impact of drought, as defined by the New Zealand Drought Index (NZDI), on-farm income and profits across the main agricultural regions in New Zealand. We use farm micro-data (tax forms) from Statistics New Zealand's Longitudinal Business Database (LBD). The empirical strategy relies on region-specific panel-data models with fixed effects. We find that outcomes vary across regions and land uses. The main dairy regions (Waikato and Taranaki) have experienced significant positive impacts, likely resulting from drought-induced higher milk prices. In contrast, sheep/beef farms’ gross income and profit were negatively affected by droughts across most sheep/beef regions. Across all regions, the estimations also show that drought events do not have any observable persistent impact on farm income and profits, on average, past the first couple of years.