The impacts of temperature on Chinese food processing firms*

China supplied 4.1% of the global agro-food exports in 2019, which is worth $65 billion in sales. The vulnerability of this sector to climatic factors has been growing with climate change that not only affects the costs of primary products but may also affect the costs of processing by reducing input productivity. Existing studies have examined the impacts of a changing climate on yields of major crops, but the sensitivity of the food processing sector to rising temperatures has not been assessed. Here we show, using a rich firm-level data set of food processing firms and daily weather in China for the 1998–2007 period, that accounting profits of Chinese food processing firms exhibited non-linear responses to temperature changes, peaking at a daily average temperature of 21–24°C and declining sharply at higher temperatures. Higher temperatures have wide-ranging effects – raising final-good inventory levels, hurting innovation activity, and reducing industrial output by decreasing TFP, investment in capital and capital stock, all of which caused the adverse impacts of higher temperatures on profits. If no additional adaptation is undertaken, the total profits and output of Chinese food processing firms are projected to decline annually by 15–25% and 14–22%, respectively, under RCP8.5 of the global climate models HadGEM2-ES and NorESM1-M by 2080.