The impact of drought on farm economic performance: evidence from Sweden

We estimate the effect of drought on farm economic performance, examine the sensitivity of farms' historical performance to drought conditions, and determine the effect of a future increase in drought conditions on farm economic performance. Since the effects of drought are both spatially and temporally heterogeneous, we adopt a panel regression method that accounts for multidimensional fixed effects in all regression parameters. We apply this method to a dataset from south-central Sweden spanning the period from 2001 to 2018. The results indicate that an increase in consecutive dry days or drought leads to a decrease in farm income by about 5%, on average, with systematic variation in the effects across municipalities. The findings further suggest significant sensitivity of farm income to drought from 2003 to 2004 and from 2014 to 2018. The results also indicate that drought negatively affects other farm outcome variable such as farm resource use efficiency and farm net value added.