IMPACT OF DROUGHTS ON FINANCIAL MARKETS AND THE ECONOMY: EVIDENCE FROM DAIRY, SHEEP AND BEEF FARMING

Three manuscripts form the foundation of this dissertation exploring the impact of droughts on financial markets and the economy focusing on dairy, sheep and beef farming. The first manuscript exhibited in chapter 2 advances the knowledge by empirically examining the relationships between droughts and farms’ capital structure (measured in terms of real debt and equity) in New Zealand. Using microeconomic farm-level financial information accessible from the tax authorities, we evaluate how past droughts (measured by the New Zealand Pasture Growth Index) impact farms' capital structure. We demonstrate that impact of droughts on short-term and long-term debts, equity for dairy farms, and short-term debt for sheep and beef farms is positive and statistically significant. The second manuscript described in chapter 3 empirically tests the relationships between droughts (as measured by the New Zealand Pasture Growth Index-NZPGI) and banks' agricultural non-performing loans (NPLs) (loans overdue by 90 days or more) at the regional level. This estimation pools data from the National Institute of Water and Atmospheric Research Ltd (NIWA), the Reserve Bank of New Zealand (RBNZ), and Federated Farmers' farming surveys and tests the model using panel data fixed-effects regression modelling. Our results illustrate a statistically significant positive impact of droughts on dairy farming NPLs. However, we find no significant impact of droughts on sheep/beef farming NPLs. The third manuscript stated in chapter 4 outlines the impact of droughts on dairy, sheep, and beef sector exports – measured in terms of both volume and value. This study produces estimates at the world, and income level, based on data from UN Comtrade, the World Bank, and a measure of droughts (the Standardized Precipitation Evapotranspiration Index) of regularly exporting countries from 1995-2020. Findings suggest that droughts over the studied time significantly affected agricultural export quantities of dairy, sheep, and beef. We find that while high-income nations exhibit a greater decline in the export of beef and sheep both during and after droughts, medium-low-income countries show a greater reduction in the export of dairy products during droughts. We also find that the influence of droughts on export values is positive for the dairy sector while it is negative for the sheep sector.