Climate extremes, irrigation and farms’ adaptation to climate change: The Danish case

Climate change impacts farms’ risk profiles and farms’ expected returns; yet farms seem to be reluctant to invest into adaption measures. Previous literature suggests that delayed adaptation is due to the real option nature of such investments: irreversibility, flexibility in timing, and (economic) uncertainty. We test these theoretical considerations by empirically examining irrigation uptake among Danish farms. We consider production inefficiency, market and weather risk, and experienced climate extremes as determinants of irrigation adoption behavior. Our analysis uses a panel of 1,104 farm-level observations from the FADN for 2007–2020 combined with weather, climate and price data. We model farms’ persistent inefficiency using a 4-component stochastic frontier; a panel logit quantifying the effects of inefficiency, climate extremes, and price and weather volatility on adoption. Our results align with predictions from real options theory: higher market uncertainty lowers adoption rates, whereas exposure to extreme drought increases the probability of investing. Results also suggest that crop-market signals matter, suggested by higher adoption rates under greater potato price volatility, indicating anticipatory investment when upside price risk is salient. We find that higher farm-level efficiency is associated with a lower propensity to invest, pointing either to substitution toward other risk-management or yield-enhancing strategies, or to less binding water constraints on already efficient farms. Our current results therefore suggest that additional policy initiatives may be required to foster adaptation levels adequate for expected climate change development.