Iddo Kan and Ayal Kimhi* * Authors are affiliated with the - PowerPoint PPT Presentation

Climate Change, Agricultural Adaptation, and Food Prices: A Partial Equilibrium Approach using Micro Data Iddo Kan and Ayal Kimhi* * Authors are affiliated with the Department of Agricultural Economics and Management, the Robert H. Smith Faculty of Agriculture, Food and Environment, The Hebrew University, and with the Center for Agricultural Economic Research. * Kimhi is currently visiting at the Research Institute for Humanity and Nature (RIHN) in Kyoto, Japan. Helsinki, September 28 th , 2012

Structure of presentation • Methodological approach • Application to Israeli agriculture 2

Modeling farm responses to climate change • Production approach: experimental or empirical effects of climate change on yields • Ricardian approach: empirical effects of climate change on farm profits or land values • Integrated approach: empirical effects of climate change on farmers’ decisions feeding into market equilibrium changes that in turn affect farmers’ decisions. 3

How will climate change affect agriculture? • Direct effect: Farmers will alter their crop portfolios • Indirect effect: crop prices will change as a result of the changes in supply, and this will lead to further changes in crop portfolios • New equilibrium: these effects feed into each other until convergence 4

Previous research and our contribution • Kaminski et al. (AJAE, forthcoming): A structural model of regional land allocation among crop-technology bundles • Our contribution: – Adding the market equilibrium component – Estimating land allocations at village level – Allowing for corner solutions in land allocation 5

Analysis Flowchart Production Climate Output factors factors prices Demand elasticities Village-level crop portfolio and land allocation model Nationwide production Nationwide demand Nationwide partial equilibrium Value of local production Consumer and imports surplus

Structure of presentation • Methodological approach • Application to Israeli agriculture – Why is Israeli agriculture a good case study? 7

Sea of 470km N Galilee Jordan Valley Mediterranea Mountain Range n Sea Coastal Plain Dead Sea Altitude 135 km 600-1200 300-600 0-300 <0 22,000 km 2 8 Red Sea

SEASONS Rainy Winter November-March Dry Summer June -August 9

Lebanon 1,200 mm Sub Tropic Semi Arid Arid 50 mm Egypt 10

Varied climate conditions, topography and soil types stimulate the development of unique agricultural technologies  Climate : Subtropical to Arid  Topography : - 408m to 1,208m  Soil : Sand dunes to Heavy Loam 11

Value of agricultural production (2010) 2% of Net Domestic Product 12

Climate Change Forecast for Israel January Temperature Precipitation April 700 32 mm/year July October 30 Average 600 28 26 500 24 22 C o 400 20 18 300 16 14 200 12 10 100 8 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 Year Year 13

Previous research on Israel • Kan et al. (2007) – Mathematical programming applied to regional data – 20% decrease in net farm revenues by 2100 • Fleischer et al. (2008) – Ricardian approach applied to farm-level data – Moderate climate change beneficial but extreme changes harmful • Kaminski et al. (forthcoming) – structural land allocation model applied to regional data from Israel – Up to 10% decrease in aggregate farm profits by 2060 14

Data • 1992-2002 annual data from 793 communities • 7 crop-technology bundles: – Irrigated field crops – Rain-fed field crops – Open-field vegetables – Covered vegetables – Deciduous fruits – Subtropical fruits – Citrus and other fruits 15

Agricultural communities Lebanon Egypt 16

Crop portfolios Fraction of All sample Per-grower Activity growers (dunam) (dunam) _______________________________________________________________________________________________________________ Vegetables, covered 27% 27 101 Vegetables, open field 73% 804 1,105 Field crops, irrigated 56% 879 1,573 Field crops, rain-fed 65% 1,319 2,016 Deciduous fruits 36% 123 338 Subtropical fruits 63% 174 274 Citrus & other fruits 82% 421 513 17

Climate data Precipitation mm/year 395.1 Precipitation S.D. mm/year 121.6 Degree days - January C o 145.1 Degree days –April C o 328.7 Degree days – July C o 576.9 Degree days – October C o 441.3 Degree days – inter-annual S.D. C o 198.9 Degree days – intra-annual S.D. C o 5.6 Degree days above 34 C o C o 0.46 Degree days below 8 C o C o 6.4 18

Crop price indices 100 90 80 70 60 50 40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Field crops Vegetables Citrus Other fruits 19

Climate variables coefficients Vegetables Vegetables Field crops Field crops Citrus & Variable Covered Open field Irrigated Rain-fed Deciduous Subtropic. Other -1.543** 19.69*** 9.21*** 8.715** 7.759*** -0.532 -17.73*** Precipitation 6.897*** -32.65*** -14.87** -72.07*** -18.93*** 7.521*** 51.98*** Precipitation S.D. -8.232*** 15.13** -8.701 11.73 -2.736 -9.753*** 9.341** Deg. days - Jan. -0.242 58.61*** 34.44*** -16.03* 25.55*** -0.730 -7.721** Deg. days –April 30.52*** 49.3*** 42.58*** 50.58*** -18.89*** -9.886*** 12.81** Deg. days – July -10.69*** -17.93* -37.23*** -4.802 -43.71*** 27.49*** 11.36* Deg. days – October 2.99* 1.229 11.33** 82.05*** 17.76*** -8.067*** 2.681 DD - inter ann. S.D. -1552*** -920 -2796*** -1851** -1852*** 419.4*** 917.8*** DD - intra ann. S.D. 61.83** -476.6*** -885.5*** -1190*** 152.3*** 221.2*** -472.8*** DD above 34C o -5.118** 20.54*** 27.02*** -34.04*** 14.61*** -1.568 5.705* DD below 8C o 20

Precipitation by climate Periods mm/year 700 1981-2000 2001-2020 2021-2040 2041-2060 600 500 400 300 200 100 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 Year

Climate Change Relative to 1981-2000 (%) 160 160 140 2001 - 2020 140 120 120 2021 - 2040 100 100 80 80 2041 - 2060 60 60 40 40 20 20 0 0 - 20 - 20 - 40 - 60 - 80 - 100

Demand functions Price Index 3.5 3 2.5 2 International price 1.5 1 Field crops 0.5 0 0 0.5 1 1.5 2 Quantity Index

Forecasted price indices 160 Vegetables Vegetables Vegetables 150 140 130 120 Fruits Fruits 110 Fruits 100 90 80 1981-2000 2001-2020 2021-2040 2041-2060 Field Crops Fruits Vegetables

Forecasted land allocations 100% 90% Citrus & other plantations 80% Sub tropic plantations Deciduous 70% Field crops, rainfed 60% Field crops, irrigates 50% Vegetables, open space 40% Vegetables, covered 30% 20% 10% 0% 1981 - 2001- 2021- 2041- 2001- 2021- 2041- 2000 2020 2040 2060 2020 2040 2060 Fixed prices 25 Baseline Partial equilibria

Quantity Index of Total Production 140 120 100 80 60 40 20 0 1981-2000 2001-2020 2021-2040 2041-2060 2001-2020 2021-2040 2041-2060 Fixed prices Baseline Partial equilibria 26

Value of Total Production (million NIS) 9 8 7 6 5 4 3 2 1 0 1981-2000 2001-2020 2021-2040 2041-2060 2001-2020 2021-2040 2041-2060 Fixed prices Baseline Partial equilibria 27

Value of Production, Imports and Consumption under partial equilibria (million NIS) 7 6 5 Imports Imports Imports 4 3 2 Production Production Production Production 1 0 1981-2000 2001-2020 2021-2040 2041-2060 28

Summary • Climate change is expected to bring about considerable changes in Israeli agriculture • Ignoring price changes may lead to erroneous production expectations • Our methodology takes into account: – Effects of price changes – Changes in crop portfolios at the farm level, including corner solutions 29

Wastewater recycling 30 Source : Lavee and Ash (forthcoming)

Water sources (million m 3 ) 3,000 2,500 Desalinated 2,000 1,500 Recycled 1,000 Natural 500 0 1960 1970 1980 1990 2000 2010 2020 2030 Source : Yoav Kislev, Taub Center (2012)

Water prices and direct costs water for agriculture (in $US/CM, 2010 prices) 0.60 0.50 0.40 Cost 0.30 Price 0.20 0.10 0.00 1950 1960 1970 1980 1990 2000 2010 32 Source : Modified from Yoav Kislev, “Water Pricing” (2010) and Taub Center (2012)