We quantify the impacts of droughts in New Zealand on the profitability of dairy, sheep and beef farms using a comprehensive administrative database of all farms in New Zealand. For dairy farms, we found that drought events have positive impacts on dairy farms’ revenue and profit in the year of the drought. This effect is most likely attributable to drought‐induced increases in the export price of milk solids, as New Zealand is the market maker in this global market and almost all domestic dairy production is exported. All of these quantified impacts, however, are not very large, suggesting that, at this point in time, droughts have a fairly moderate impact on New Zealand dairy and sheep–beef businesses.

The effect of climate change on hydrology and water resources is possibly one of the most important current environmental challenges, and it will be important for the rest of the 21st century. Climate change is anticipated to intensify the hydrological cycle and to change the temporal and spatial distribution patterns of water resources. It is predicted to increase the frequency and intensity of extreme hydrological events, such as heavy rainfall and floods, but in some locations also droughts. Water-related hazards occur due to complex interactions between atmospheric and hydrological systems. These events can then cause economic disasters, societal disturbances, and environmental impacts, which can pose a major threat to lives and livelihoods if they happen in places that are exposed and vulnerable to them. The economic impacts of extreme hydrological events can be separated into direct damage and indirect losses. Direct damage includes the damages to fixed assets and capital; losses of raw materials, crops, and extractable natural resources; and, most importantly, mortality, morbidity, and population displacement. All can be a direct consequence of the extreme hydrological event. Indirect losses are reductions in economic activity, particularly the production of goods and services—which will be greatly decreased after the disaster and because of it. Possibly the most damaging hydro-meteorological hazard, drought, is also the one that is least understood and the most difficult to quantify—even its onset is often difficult to identify. Drought is recognized as being associated with some of the most high-profile humanitarian disasters of past years, threatening the lives and livelihoods of millions of people, particularly those living in semi-arid and arid regions. Drought impacts depend on a set of weather parameters—high temperatures, low humidity, the timing of rain, and the intensity and duration of precipitation, as well as its onset and termination—and they depend on the population and assets and their vulnerabilities. While drought has wide-ranging effects on many economic sectors, the agricultural sector bears much of the impact, as it is very dependent on precipitation and evapotranspiration. Approximately 1.3 billion people rely on agriculture as their main source of income. In developing countries, the agriculture sector absorbs up to 80% of all direct damages from droughts. Droughts may be the biggest threat to food security and rural livelihoods globally, and they can increase local poverty, displace large numbers of people, and hinder the already fragile progress that has been made toward the achievement of Sustainable Development Goals (SDGs). As such, understanding droughts’ impacts, identifying ways to prevent or ameliorate them, and preventing further deterioration in the climatic conditions and social vulnerabilities that are their root causes are all of utmost importance.

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This paper examines how differences in climate across space influence the value of New Zealand agricultural land. We use the Ricardian approach to price the climate, using property valuation data from 1993 to 2018. We apply the ‘spatial first differences’ method, which compares differences in climate between neighbours with differences in land values between neighbours. This method allows us to estimate the impact of long-term climate conditions on farmland values across different land-uses, while controlling for sources of bias associated with unobserved heterogeneity. We find that a warmer or drier climate is associated with higher farmland values in New Zealand. As the spatial first differences method accounts for unobserved heterogeneity associated with variables not related to climate, these associations likely represent causal effects on land values of variables tied to climate. While agricultural productivity is one pathway by which climate affects land values, our results may also be due to variation in the value of land improvements tied to climate or amenity values associated with the option value to convert to a residential use.

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