Hedging against Climate Change Risk with Trade: Heat stress and Global Agricultural Markets

With the large number of empirical estimates of climate change damages, particularly heat stress shocks and ad hoc recommendations of trade as an adaptation tool in combating climate change, empirical evidence of trade’s mitigative effect is relatively scarce, if at all available. In empirically investigating this role of trade, we find evidence in support of trade reactions to past shocks in heat stressors, as well as hedging against future shocks in global agricultural markets. We also find that successful hedging via trade is successful as countries can diversify their supply, thereby reducing associated price volatility, however, this comes at the expense of higher agricultural production volatility. Finally, our analysis highlights the relevance of the weather characteristics of trading partners, with successful hedging along the breadth (increased partnerships) and depth (increased value) of trade driven by countries in different and the same agroecological zones respectively.