Recency Effect of Yield Shocks on Crop Choice in the US Corn Belt

• Agricultural Economics Workshop

Date and Location

Thursday, October 27, 2022, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

As climate change is projected to increase extreme heat events in frequency and severity, farmers are expected to experience an increase in crop yield variability. Using field-level crop choice data in the major US Corn Belt states (Iowa, Illinois, and Indiana), this study uncovers statistical evidence that crop choice decisions in the region feature recency effects associated with local yield shocks that are largely driven by plausibly random weather. In the region, short-run acreage adjustment occurs mainly along the intensive margin (transition between corn and soybeans). I show that farmers are less likely to plant corn—which is more susceptible to heat/water stress than soybeans—after a hotter or drier than average year, irrespective of the within-season timing of the heat. This means that low yields of corn or soybeans in one year predict less corn being planted in the subsequent year. Interestingly, relative yield does not predict the probability of growing corn next year. Based on the insights from my conceptual model, these empirical results suggest that farmers respond sensitively to total exposure to extreme heat during the previous growing season but do not respond to when it was concentrated (e.g., 1 st half or 2nd half of the growing season) or which crop it affected most. My work highlights that potentially sub-optimal overreaction to "noise"; can play an important role in shaping farmers' adaptive responses to a changing climate.

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