Climate Change and the Agricultural Economy

1. Climate Change and the Agricultural Economy Elizabeth Marshall, USDA, Economic Research Service

2. Agriculture & adaptation Agriculture is actually a hierarchy of systems The economic implications of climate change�s biophysical impacts are shaped by an array of local, national and global institutions, from commodity markets to systems of research, development, education, communication, and transportation Economic impacts are as much a function of adaptive capacity as they are of the biophysical impacts of changing climate conditions on crop growth and development. Capacity for adaptation is a critical determinant of the net economic impacts of climate change and of the regional distribution of those impacts. This graph isn�t self-contained, as these systems interact with other systems through competition for inputs and resources such as land, water, capital Agriculture is actually a hierarchy of systems The economic implications of climate change�s biophysical impacts are shaped by an array of local, national and global institutions, from commodity markets to systems of research, development, education, communication, and transportation Economic impacts are as much a function of adaptive capacity as they are of the biophysical impacts of changing climate conditions on crop growth and development. Capacity for adaptation is a critical determinant of the net economic impacts of climate change and of the regional distribution of those impacts. This graph isn�t self-contained, as these systems interact with other systems through competition for inputs and resources such as land, water, capital

3. Economic Impact Assessment Economic impact estimates are sensitive to a number of research elements: Scope of the Assessment Adaptation Opportunities and Constraints Climate and Yield Projections (and associated time horizon) Methodology Used, Model Specification The task of economic impact assessment is to take a set of assumptions or projections about future climate conditions, generally including some combination of information on patterns and magnitude of temperature and precipitation change (Tol, 2009). Local climate conditions must be then translated into local yield and production cost impacts at some level of spatial resolution, and then all those impacts must be integrated into some representation of the potential production, price, consumption, technology development and trade responses to those productivity impacts in order to estimate how the entire system is going to respond and what the likely economic impacts will be. One obvious scope issue is to what extent is the study able to capture the types of opportunities for adaptation that we just discussed. Methods used for climate change impact assessment include expert opinion, hedonic and production function approaches, and integrated assessment modeling Climate impact analysis farther into the future generally shows greater impact on yields and economic indicators, though there is also greater uncertainty about future emissions trajectories, projected changes in climate variables, and available adaptive technologies The task of economic impact assessment is to take a set of assumptions or projections about future climate conditions, generally including some combination of information on patterns and magnitude of temperature and precipitation change (Tol, 2009). Local climate conditions must be then translated into local yield and production cost impacts at some level of spatial resolution, and then all those impacts must be integrated into some representation of the potential production, price, consumption, technology development and trade responses to those productivity impacts in order to estimate how the entire system is going to respond and what the likely economic impacts will be. One obvious scope issue is to what extent is the study able to capture the types of opportunities for adaptation that we just discussed. Methods used for climate change impact assessment include expert opinion, hedonic and production function approaches, and integrated assessment modeling Climate impact analysis farther into the future generally shows greater impact on yields and economic indicators, though there is also greater uncertainty about future emissions trajectories, projected changes in climate variables, and available adaptive technologies

4. Scope: Adaptation options This is hardly an exhaustive list; There will be changes in farm production practice in direct response to changing climate conditions� irrigation changes, changes in timing of field operations, etc. But the suite of adaptation options is much more comprehensive than that, with the entire system adjusting to the impacts of those changes on input and output markets. The agricultural sector can adapt to climate change at a number of levels, from national level investments in climate forecasting or infrastructure to behavioral adjustments of individual farm households. Consumers can adapt by changing diet patterns, and Changes in trade policies due to concerns about food security. If we don�t capture the full suite of adaptation options, we may be underestimating the flexibility of the agricultural system to respond to changing climate conditions. This is hardly an exhaustive list; There will be changes in farm production practice in direct response to changing climate conditions� irrigation changes, changes in timing of field operations, etc. But the suite of adaptation options is much more comprehensive than that, with the entire system adjusting to the impacts of those changes on input and output markets. The agricultural sector can adapt to climate change at a number of levels, from national level investments in climate forecasting or infrastructure to behavioral adjustments of individual farm households. Consumers can adapt by changing diet patterns, and Changes in trade policies due to concerns about food security. If we don�t capture the full suite of adaptation options, we may be underestimating the flexibility of the agricultural system to respond to changing climate conditions.

5. Scope: adaptation constraints Adaptation Constraints: Potential constraints to adaptation such as regional land and water availability, as well as constraints related to farm finances and viability, have received relatively little research attention yet have been shown to significantly impact the results emerging from integrated assessments of climate change impacts. The migration of crop production in response to climate change has been recognized as a likely adaptation mechanism since the early days of integrated assessment modeling (Adams et al. 1995; Darwin, Tsigas, Lewandrowski, and Raneses 1995). In the United States, research suggests that warming temperatures will cause a northerly shift in the comparative advantage of production regions, with producers in Northern regions generally faring better under changing climate conditions than producers in the South (Adams et al. 1995) (Darwin, 1995). � Regional capacity for expanding agriculture or irrigated production will depend on resource constraints such as the availability of land and water (Darwin, 1995). Large bands of uncertainty around future projections for regional precipitation change make it difficult to predict with precision regional changes in relative productivity, and estimates of net land brought into production as a result of climate change are mixed and highly sensitive to which models and climate assumptions or scenarios are used in the estimation (Zhang and Cai 2011). In general, however, studies estimate that arable land increases at the higher latitudes, including Canada, Russia, northern U.S., and Southern Argentina, and decreases in western Africa, central America, western Asia, the south-central U.S. and northern South America (Ramankutty, Foley, Norman, and McSweeney 2002; Zhang and Cai 2011) (see Table 1). Fischer et al (Fischer, Shah, N. Tubiello, and van Velhuizen 2005) estimate that by the 2080s, expansion of cropland in southeast Asia will be particularly constrained due to land-use competition from other sectors combined with a lack of suitable agricultural land. Adaptation Constraints: Potential constraints to adaptation such as regional land and water availability, as well as constraints related to farm finances and viability, have received relatively little research attention yet have been shown to significantly impact the results emerging from integrated assessments of climate change impacts. The migration of crop production in response to climate change has been recognized as a likely adaptation mechanism since the early days of integrated assessment modeling (Adams et al. 1995; Darwin, Tsigas, Lewandrowski, and Raneses 1995). In the United States, research suggests that warming temperatures will cause a northerly shift in the comparative advantage of production regions, with producers in Northern regions generally faring better under changing climate conditions than producers in the South (Adams et al. 1995) (Darwin, 1995). � Regional capacity for expanding agriculture or irrigated production will depend on resource constraints such as the availability of land and water (Darwin, 1995). Large bands of uncertainty around future projections for regional precipitation change make it difficult to predict with precision regional changes in relative productivity, and estimates of net land brought into production as a result of climate change are mixed and highly sensitive to which models and climate assumptions or scenarios are used in the estimation (Zhang and Cai 2011). In general, however, studies estimate that arable land increases at the higher latitudes, including Canada, Russia, northern U.S., and Southern Argentina, and decreases in western Africa, central America, western Asia, the south-central U.S. and northern South America (Ramankutty, Foley, Norman, and McSweeney 2002; Zhang and Cai 2011) (see Table 1). Fischer et al (Fischer, Shah, N. Tubiello, and van Velhuizen 2005) estimate that by the 2080s, expansion of cropland in southeast Asia will be particularly constrained due to land-use competition from other sectors combined with a lack of suitable agricultural land.

6. Scope: Trade effects There is no single tool available that would allow us to capture ALL of the intricacies and nuances of the dynamics involved in a complex agricultural systems that goes from the level of field to that of nations. (to develop such a tool would require that we have another planet at our disposal) So economic impact assessments generally look at a portion of the picture and hold the rest constant or allow it to change only very roughly. It is important when evaluating economic impact assessment estimates to understand exactly WHAT portion is being represented in the scale of the study. Scope: types of available adaptation options and whether the assessment includes consumer response and impact as well as that of producers, livestock and forest production as well as cropland agriculture, and international interests as well as domestic interests The scope of analysis is also defined by the number of sectors included in the impact analysis. Existing analyses of agricultural impacts have focused on climate change�s impacts on cropland agriculture, with some expansion, often in the case of simulation modeling efforts, to include the impacts of changing feed prices or competition for pasture land on the livestock sector (Reilly et al. 2003). Climate change will directly impact cropland, forestry, and livestock (as well as all the other sectors of the economy) simultaneously, however, and only a small subset of studies have looked at the impacts of changing relative productivity across sectors on decisions regarding land use and shifting patterns of crop, livestock, and timber products (Alig, Adams, and McCarl 2002; Darwin, Tsigas, Lewandrowski, and Raneses 1995; Reilly et al. 2007; Sands and Edmonds 2005). Major worldwide commodity trade flows of corn http://www.unctad.info/en/Infocomm/AACP-Products/Commodity-Profile---Corn/There is no single tool available that would allow us to capture ALL of the intricacies and nuances of the dynamics involved in a complex agricultural systems that goes from the level of field to that of nations. (to develop such a tool would require that we have another planet at our disposal) So economic impact assessments generally look at a portion of the picture and hold the rest constant or allow it to change only very roughly. It is important when evaluating economic impact assessment estimates to understand exactly WHAT portion is being represented in the scale of the study. Scope: types of available adaptation options and whether the assessment includes consumer response and impact as well as that of producers, livestock and forest production as well as cropland agriculture, and international interests as well as domestic interests The scope of analysis is also defined by the number of sectors included in the impact analysis. Existing analyses of agricultural impacts have focused on climate change�s impacts on cropland agriculture, with some expansion, often in the case of simulation modeling efforts, to include the impacts of changing feed prices or competition for pasture land on the livestock sector (Reilly et al. 2003). Climate change will directly impact cropland, forestry, and livestock (as well as all the other sectors of the economy) simultaneously, however, and only a small subset of studies have looked at the impacts of changing relative productivity across sectors on decisions regarding land use and shifting patterns of crop, livestock, and timber products (Alig, Adams, and McCarl 2002; Darwin, Tsigas, Lewandrowski, and Raneses 1995; Reilly et al. 2007; Sands and Edmonds 2005). Major worldwide commodity trade flows of corn http://www.unctad.info/en/Infocomm/AACP-Products/Commodity-Profile---Corn/

7. Climate and yield projections Several studies have underlying yield assumptions broadly consistent with the IPCC (2007) findings: �moderate climate change will likely increase yields of North American rain-fed agriculture� Crop productivity is projected to increase slightly at mid- to high latitudes for local mean temperature increases of up to 1 to 3�C, and then decrease beyond that. Some studies not consistent with IPCC findings: Kucharik and Serbin, 2008 Lobell and Asner, 2003 Kucharik and Serbin: Use historical data to suggests that yields of soybeans and corn are already declining with temperature Here we show that trends in precipitation and temperature during the growing season from 1976�2006 explained 40% and 35% of county corn and soybean yield trends, respectively. Using county level yield information combined with climate data, we determined that both corn and soybean yield trends were enhanced in counties that experienced a trend towards cooler and wetter conditions during the summer. Our results suggest that for each additional degree ( ?C) of future warming during summer months, corn and soybean yields could potentially decrease by 13% and 16%, respectively, whereas if modest increases in total summer precipitation (i.e. 50 mm) were to occur, yields may be boosted by 5�10%, counteracting a portion of the negative effects associated with increased temperature. Lobell and Asner: The slope of regression (ry) indicates a roughly 17% relative decrease in both corn and soybean yield for each degree increase in growing season temperature. Previous modeling studies predict changes of similar magnitude for a 3� temperature increase, suggesting that the observed sensitivity is higher than previously expected (6). Kucharik and Serbin: Use historical data to suggests that yields of soybeans and corn are already declining with temperature Here we show that trends in precipitation and temperature during the growing season from 1976�2006 explained 40% and 35% of county corn and soybean yield trends, respectively. Using county level yield information combined with climate data, we determined that both corn and soybean yield trends were enhanced in counties that experienced a trend towards cooler and wetter conditions during the summer. Our results suggest that for each additional degree ( ?C) of future warming during summer months, corn and soybean yields could potentially decrease by 13% and 16%, respectively, whereas if modest increases in total summer precipitation (i.e. 50 mm) were to occur, yields may be boosted by 5�10%, counteracting a portion of the negative effects associated with increased temperature. Lobell and Asner: The slope of regression (ry) indicates a roughly 17% relative decrease in both corn and soybean yield for each degree increase in growing season temperature. Previous modeling studies predict changes of similar magnitude for a 3� temperature increase, suggesting that the observed sensitivity is higher than previously expected (6).

8. Extreme Events One element of yield impact that has not received sufficient attention in economic impact studies is the effect of extreme events. While not new to farmers, extreme events are projected to occur with increasing frequency as atmospheric temperatures increase. A failure to incorporate changes in the variability of returns to farming, rather than just changes in average returns, may overestimate the financial viability of farms faced with changing climate conditions. NRCS photos Floodwaters overtake this farm near Council Bluffs, Iowa. Flooding of North Main Street In Fort Worth, Texas during the Dust Bowl. Photo: FEMA, Missouri River floodwaters inundate Hamburg. Many bridges crossing the Missouri have been closed causing residents to travel hours to and from their jobs. A Presidential emergcency declaration has been declared in the states of Kansas and Nebraska. Jace Anderson/FEMA One element of yield impact that has not received sufficient attention in economic impact studies is the effect of extreme events. While not new to farmers, extreme events are projected to occur with increasing frequency as atmospheric temperatures increase. A failure to incorporate changes in the variability of returns to farming, rather than just changes in average returns, may overestimate the financial viability of farms faced with changing climate conditions. NRCS photos Floodwaters overtake this farm near Council Bluffs, Iowa. Flooding of North Main Street In Fort Worth, Texas during the Dust Bowl. Photo: FEMA, Missouri River floodwaters inundate Hamburg. Many bridges crossing the Missouri have been closed causing residents to travel hours to and from their jobs. A Presidential emergcency declaration has been declared in the states of Kansas and Nebraska. Jace Anderson/FEMA

9. The results of economic assessments have varied widely over the past few decades, not because their results necessarily conflict with each other, but because they are capturing and representing a different set of moving parts in each case. This is just a sampling of the some of the results from domestic economic impact studies that have been done. Consumer welfare is almost entirely a function of prices. Annual changes in consumers' surplus is often used, which is a measure equivalent to the amount of income lost or gained by agricultural commodity consumers when prices change. For example, when prices increase welfare is lower because consumers need to spend more for the same amount of food items, and they therefore can afford somewhat less of other goods. Producer welfare is usually measured as some function of net income change, which captures both the changes in the price and the original biophysical impacts on crop yields. The results of economic assessments have varied widely over the past few decades, not because their results necessarily conflict with each other, but because they are capturing and representing a different set of moving parts in each case. This is just a sampling of the some of the results from domestic economic impact studies that have been done. Consumer welfare is almost entirely a function of prices. Annual changes in consumers' surplus is often used, which is a measure equivalent to the amount of income lost or gained by agricultural commodity consumers when prices change. For example, when prices increase welfare is lower because consumers need to spend more for the same amount of food items, and they therefore can afford somewhat less of other goods. Producer welfare is usually measured as some function of net income change, which captures both the changes in the price and the original biophysical impacts on crop yields.

10. GLOBal GDP Impact Estimates Studies that look at one or two points in time only Point: SENSITIVITY TO TIME HORIZON: More useful are studies that show behavior over time. To try to determine what a suite of such point-in-time studies can tell us about welfare impacts over time, Tol performed an uncertainty analysis on 14 existing global impact estimates for temperature increases. The circles here represent the welfare estimates, and the heavy line in the middle is the line that has been statistically fit to those estimates. The fitted line in Figure 1 suggests that the turning point in terms of economic benefits occurs at about 1.1�C warming (with a standard deviation of 0.7�C). Global analyses of the impacts of climate change on GDP that are not limited to the agricultural sector often find near-term economic benefits associated with modest changes in climate that are followed by losses further in the future as temperatures continue to increase (Hitz and Smith 2004; Tol 2009). IPCC (2007) projected that crop productivity would begin to decline, even in temperate regions, when temperature increases exceed 1-3� C. Burke et al (Burke, Dykema, Lobell, Miguel, and Satyanath 2011) project that both corn yields and farm profits would decline under a large range of climate projections in the United States for time ranges in the mid and late 21st century. Source, TOL, Richard S. J. Tol Journal of Economic Perspectives, Volume 23 2009 Studies that look at one or two points in time only Point: SENSITIVITY TO TIME HORIZON: More useful are studies that show behavior over time. To try to determine what a suite of such point-in-time studies can tell us about welfare impacts over time, Tol performed an uncertainty analysis on 14 existing global impact estimates for temperature increases. The circles here represent the welfare estimates, and the heavy line in the middle is the line that has been statistically fit to those estimates. The fitted line in Figure 1 suggests that the turning point in terms of economic benefits occurs at about 1.1�C warming (with a standard deviation of 0.7�C). Global analyses of the impacts of climate change on GDP that are not limited to the agricultural sector often find near-term economic benefits associated with modest changes in climate that are followed by losses further in the future as temperatures continue to increase (Hitz and Smith 2004; Tol 2009). IPCC (2007) projected that crop productivity would begin to decline, even in temperate regions, when temperature increases exceed 1-3� C. Burke et al (Burke, Dykema, Lobell, Miguel, and Satyanath 2011) project that both corn yields and farm profits would decline under a large range of climate projections in the United States for time ranges in the mid and late 21st century. Source, TOL, Richard S. J. Tol Journal of Economic Perspectives, Volume 23 2009

11. U.S. Farm return impacts ($millions/year) Point: Variable impact over regions! Averages mask a great deal of regional variabilityPoint: Variable impact over regions! Averages mask a great deal of regional variability

12. Additional impacts due to Pest damage Includes impacts of pests on input costs and on yields Pest damages and expenditures migrate northward corn earwormIncludes impacts of pests on input costs and on yields Pest damages and expenditures migrate northward corn earworm

13. General conclusions In the short term, existing adaptation strategies will provide substantial adaptive capacity Some estimates point to initial benefits of a modest increase in temperature, followed by losses as temperatures increase further No consensus on likely domestic yield responses International impacts will be more significant A failure to consider management costs for biotic stressors may overstate farms� financial viability in the face of changing climate conditions Economic impacts are variable across regions and stakeholders While the biophysical impacts of climate change play out locally the economic implications of those impacts are shaped by an array of local, national and global institutions, from commodity markets to systems of research, development, education, communication, and transportation In the short term, existing adaptation strategies will provide substantial adaptive capacity, mitigating the impacts of climate change on domestic producers and consumers Some estimates point to initial benefits of a modest increase in temperature, followed by losses as temperatures increase further International impacts will be more significant Longer term adaptation will require new technologies No consensus on domestic yield responses to changing climate conditions Management strategies to deal with changing biotic stress can significantly affect production costs; a failure to consider such costs may overstate farms� financial viability in the face of changing climate conditions Economic impacts are variable across regions and stakeholders New technologies take a long time to come on line, so investment in those new technologies and the educational and technical infrastructure necessary to disseminate them is critical now. While the biophysical impacts of climate change play out locally the economic implications of those impacts are shaped by an array of local, national and global institutions, from commodity markets to systems of research, development, education, communication, and transportation In the short term, existing adaptation strategies will provide substantial adaptive capacity, mitigating the impacts of climate change on domestic producers and consumers Some estimates point to initial benefits of a modest increase in temperature, followed by losses as temperatures increase further International impacts will be more significant Longer term adaptation will require new technologies No consensus on domestic yield responses to changing climate conditions Management strategies to deal with changing biotic stress can significantly affect production costs; a failure to consider such costs may overstate farms� financial viability in the face of changing climate conditions Economic impacts are variable across regions and stakeholders New technologies take a long time to come on line, so investment in those new technologies and the educational and technical infrastructure necessary to disseminate them is critical now.

14. General conclusions Impacts of climate change in the United States will depend on impacts and adaptation opportunities worldwide Scope of analysis is critical in interpreting and distinguishing among impact estimates. Integration in world markets means that impacts on climate change in the United States will depend on impacts and adaptation opportunities worldwide Producer impacts are sensitive to both the direct yield impacts and the market-mediated price impacts that emerge from domestic and global markets If global yield impacts are generally negative, it can drive global prices up despite domestic yield increases; the resulting price increases can benefit U.S. producers through increased return for their product, but U.S. consumer welfare is depresse if net global yield impacts for a given crop are also positive, then world yield impacts can further lower world and domestic prices and push benefits associated with price changes even more in favor of consumers.d by the global-market-mediated price increase Scope of analysis is critical in interpreting and distinguishing among impact estimates. Integration in world markets means that impacts on climate change in the United States will depend on impacts and adaptation opportunities worldwide Producer impacts are sensitive to both the direct yield impacts and the market-mediated price impacts that emerge from domestic and global markets If global yield impacts are generally negative, it can drive global prices up despite domestic yield increases; the resulting price increases can benefit U.S. producers through increased return for their product, but U.S. consumer welfare is depresse if net global yield impacts for a given crop are also positive, then world yield impacts can further lower world and domestic prices and push benefits associated with price changes even more in favor of consumers.d by the global-market-mediated price increase

15. Research Needs Underlying science Precipitation and hydrological balance projections Carbon fertilization Biotic as well as abiotic stressors Climate variability and incidence of climate extremes The impacts on crop yields and farm finances Economic impact estimates are only as good as the current state of science underlying its input assumptions and estimates. Improved precipitation and hydrological balance information for climate projections More robust understanding of the impacts of carbon fertilization on crop yields More comprehensive understanding of the role of biotic as well as abiotic stressors on crop growth and development The potential implications of climate change for climate variability and incidence of climate extremes The impacts of variability and extreme events on crop yields and finances Role of adaptation behavior in mitigating changes in yield and return variability Economic impact estimates are only as good as the current state of science underlying its input assumptions and estimates. Improved precipitation and hydrological balance information for climate projections More robust understanding of the impacts of carbon fertilization on crop yields More comprehensive understanding of the role of biotic as well as abiotic stressors on crop growth and development The potential implications of climate change for climate variability and incidence of climate extremes The impacts of variability and extreme events on crop yields and finances Role of adaptation behavior in mitigating changes in yield and return variability

16. Research Needs (cont.) Better understanding and treatment of uncertainty in projections Explicit risk assessment framework Improved understanding of the opportunities and constraints for economic and adaptive behavior technology, finance, policy, information, and resource limitations better understanding and treatment of uncertainty, rigorous methods for carrying such variability through crop modeling, and improved methods of incorporating variability and risk assessment into economic impact analysis improved understanding of the opportunities and constraints for economic and adaptive behavior at multiple scales within both the agricultural sector and sectors that interact with it across land, commodity, and input markets No matter how well we understand the processes, uncertainty will remain because we are projecting out into the future Credit availability for capital changes Land and water availability for ag expansion or intensificationbetter understanding and treatment of uncertainty, rigorous methods for carrying such variability through crop modeling, and improved methods of incorporating variability and risk assessment into economic impact analysis improved understanding of the opportunities and constraints for economic and adaptive behavior at multiple scales within both the agricultural sector and sectors that interact with it across land, commodity, and input markets No matter how well we understand the processes, uncertainty will remain because we are projecting out into the future Credit availability for capital changes Land and water availability for ag expansion or intensification