The Economic Impacts of Drought on US Agriculture

Droughts are among the costliest natural disasters, with average annual losses in the United States estimated in the range of $10 to $14 billion (in 2018 dollars). And these negative impacts are likely to increase in magnitude in the future as droughts become more frequent and severe with the progression of climate change.

Droughts have the potential to affect every sector of the economy, but the agricultural sector is particularly vulnerable. Below-average precipitation along with diminished surface water and groundwater supplies can reduce crop yields and affect irrigation and livestock watering. Above-average temperatures, which are also associated with droughts, can impose additional stress on crops and animals. These hydrologic and biophysical impacts, in turn, can lead to decreases in crop and livestock sales, increases in production costs, or both. Crop and animal scientists have studied the biophysical impacts of drought on crops for many years. Yet only a few studies estimate the economic cost of droughts to the agricultural sector—which is especially important as societies try to understand and account for the expected damages from climate change. To help fill this gap, researchers from RFF, the University of New Mexico, and Johns Hopkins University recently looked at how much crop yield is reduced by “incremental drought,” or an additional week of drought in any given year.

What Is a Drought, Exactly?

There is no universally accepted quantitative definition of drought. Droughts are instead usually described qualitatively as a deficit of water relative to normal conditions as referenced by water supply demand and management. A key implication of this definition is that what constitutes a drought varies across regions and over time, and also depends on the local socioeconomic context, including factors such as the composition of the local economy, access to infrastructure, and household income levels and distribution.

At the same time, governments at the federal, state, and municipal levels often use some form of quantitative measure of drought to inform drought-related policies, such as State of Emergency proclamations and eligibility for drought disaster assistance. In the United States, the drought index most often used by policymakers is the US Drought Monitor (USDM), a weekly map that indicates which regions of the country are currently in drought, as well as the intensity of those droughts (Figure 1). Drought areas are classified into one of five intensity classes, termed “abnormally dry,” “moderate drought,” “severe drought,” “extreme drought,” and “exceptional drought.”

The US Department of Agriculture (USDA), the Internal Revenue Service and state government agencies are among those that use the USDM, primarily for programs related to the agricultural sector. Some of these programs can be quite large in financial terms. For example, USDA’s Livestock Forage Disaster Program awarded more than $6 billion between 2011 and 2016 based on information contained in the USDM. This program provides livestock producers with payments to support feed costs; producers are eligible if they own or lease grazing land or pastureland located in a county rated by the USDM as having experienced severe, extreme, or exceptional drought for specified periods of time.

Very few studies estimate the economic cost of droughts to the agricultural sector. One study finds that the 1988–1989 drought in the United States led to crop losses valued at $15 billion, while another finds that the 2001–2002 Canadian drought led to agricultural losses valued at $2.3 billion. More recently, researchers from the University of California estimated the economic impact of drought in California on the state's agricultural sector. The authors report significant losses in crops ($2 billion) and dairy and livestock ($553 million), as well as additional groundwater pumping costs ($1.3 billion) in 2014, 2015, and 2016. Interestingly, some of these studies find that reductions in crop production led to increases in crop prices, thus counteracting the negative impacts of the drought on agricultural revenue. Researchers also have found that producers are further able to buffer the impact of drought by irrigating crops and selling off inventory.

What Is the Incremental Impact of Drought?

The studies summarized above are ex post studies that estimate costs to the agricultural sector associated with entire drought events. In a recent study published in the American Journal of Agricultural Economics, my colleagues and I took a different approach and estimated the impacts of incremental drought—that is, the impact of an additional week of drought in any given year. We matched crop yield data from the USDA’s National Agricultural Statistics Service to USDM drought intensity categorizations at the county level. We then used econometric techniques to estimate the impact of an additional week of drought on crop yield, focusing on corn and soybeans and also examining whether impacts are different in irrigated and non-irrigated agricultural areas.

We found that each additional week of drought in non-irrigated counties is associated with crop yield reductions in the range of 0.1 to 1.2 percent, on average. While this may seem like a small impact, one should keep in mind that these crop yield reductions are for one week of drought, and since most drought events last several weeks, the impacts can add up. Impacts in irrigated counties are smaller in magnitude, ranging from 0.1 to 0.5 percent for each additional week of drought. A focus on specific regions of the country found highly variable results. Some regions experience no yield impacts from drought, while yield reductions in non-irrigated counties in the Midwest are as high as 8.0 percent for corn and 3.1 percent for soybeans for every additional week of exceptional drought.

Our findings—that even one week of drought has the potential to be very damaging to crop yields and has extremely different impacts on crop yields in different places—can help policymakers at USDA and elsewhere improve the design of their drought assistance programs. They can use this information to target aid to specific regions, for example, and adjust the number of weeks that each region must be in drought before being eligible for aid.

The increased duration and severity of droughts, which are expected outcomes of climate change, are likely to cause additional impacts on crop production, especially in the western and southwestern United States—even in regions with access to irrigation, such as California. Livestock production systems are vulnerable to changes in the availability of feed grain, pastures, and forage crops, to declines in animal health due to temperature stresses and lack of watering, and to shifts in disease and pest distributions. Further research will improve our understanding of these impacts in socioeconomic terms, helping societies better account for the full suite of expected damages from climate change. Accurate estimates of the impacts of drought in different regions and over different time scales also can help policymakers improve the design of drought assistance programs so that they target the most affected and vulnerable communities.