Juan Pablo Rud is a Senior Lecturer in Economics at Royal Holloway, University of London and Research Associate at the Institute for Fiscal Studies (IFS).
We study the impact of extreme weather on agricultural productivity and farmer’s short-run responses in the context of a developing country. By combining detailed micro-level agricultural household surveys with daily satellite temperature and precipitation records, we create a comprehensive dataset for Peruvian farmers spanning from 2007 to 2015. We also exploit differences in the economic and geographical environment between the relatively richer and warmer coastal region and the highlands, where a large share of households are in subsistence farming and temperatures are much lower. In line with previous literature for developed countries, we find a strong and robust non-linear relationship between daily temperatures and agricultural yields. To rationalize a drop in yields in the presence of extreme temperatures, we propose a production function approach to separate first order shocks in farmers’ TFP from short-run input adjustment. Our results show strong negative effect of extreme weather on TFP in both regions. However, short-run responses are different. In the coast, yields fall because total output falls and land use is unchanged, but farmers adapt by using more family labour and spending less in hired labor. In the highlands, yields decrease because, in the presence of a shock, farmers use more (marginal) lands and manage to offset the drop in output. Furthermore, using our estimates we simulate changes in yields under different climate scenarios and find that the already warm coastal region would, on average, suffer significant losses while the cooler highlands would benefit from higher temperatures. This highlights the potential redistributive effects of climate change.