Impact of climate change on agriculture in Australia: an interactive fixed effects model approach

Developing policies and programmes aimed at mitigating the impacts of climate change on crop yield requires methods that correctly quantify the dependence of crop yield on weather. This article utilizes recent advances in econometric methodology and proposes an interactive fixed effects model for modelling crop yield. An attractive feature of the proposed model is that it allows for the varying degrees to which different farmers adapt to global events, such as, an increase in the global fertilizer price and an introduction of a new technology. Thus, the proposed method is an improvement over the standard method based on the fixed effects model, which is widely used in the literature for modelling crop yield. We apply the proposed approach to model wheat yields across 24 statistical areas that cover the wheat belt of the state of Victoria, Australia. Our forecasts point to a potential 14% loss in yields in the state of Victoria and a 27% loss in North-West Victoria, under the Hotter & Drier climate scenario, which the IPCC predicts to be more likely for Victoria in the medium term. Should this eventuate, it would have significant negative impacts on the wheat industry, food security and the economy.