Impact of Droughts on Farms’ Financing Choices: Empirical Evidence from New Zealand

Abstract

The interaction between climate change, agriculture, and financial markets is a topic that has been researched relatively little thus far. This paper intends to extend the literature by empirically testing the relationships between droughts and farms’ financing choices (measured in terms of real debt and equity) in New Zealand. Using microeconomic farm-level financial records available from the tax authorities, we quantify how past droughts (measured by the New Zealand Pasture Growth Index) impact farms' financing choices. We show a statistically significant positive impact of droughts on short-term and long-term debts, equity for dairy farms, and short-term debt for sheep and beef farms.