PUBLISHED: 06 November 2014

Economic Impacts of Drought

Drought can cost people, businesses and governments money. These impacts may be local, and only affect those in the drought-stricken area, or they may be widespread and impact people living outside the drought affected area.

Drought also has an adverse impact on different sectors, such as agriculture, energy production, tourism, and recreation.

Drought’s economic impact in agriculture

In the agricultural industry, dry conditions and lack of precipitation can damage or kill crops, negatively impacting farmers’ income. Crop loss also impacts consumers through increased food prices and the economic impacts of drought can be felt in other provinces and even countries.

For example, the drought in California that began in 2012 has impacted vegetable, fruit, and nut prices in Canada. In the year prior to February 2015 Canadians experienced a 40% increase in the price of lettuce. This was because 70% of the lettuce Canadians consume is grown in California and lettuce cannot grow in drought conditions4.

Livestock producers are impacted by drought because of a lack of drinking water and poor pasture conditions as well as increased prices of feed for livestock.

Drought Economy Cattle

A lack of food and water, or increase in the price of food and water, can lead to ranchers selling or slaughtering more animals from their herd. An increase in animals slaughtered early in a drought year may cause an initial decrease in meat prices due to overabundance of meat. However, this is often followed by an increase in meat prices as a drought persists, as there are less animals and the price to feed and water the animals has increased.

The drought in Alberta and Saskatchewan in 2015 has been cited as the cause of increased beef prices in Canada.

During the first half of 2015 parts of western Saskatchewan and eastern Alberta received less than 40 per cent of their normal rainfall. The drought resulted in a lack of suitable pastureland, causing increases in the price of feed for cattle. As a result many farmers sold large portions of their cattle. The necessity to sell cattle or pay increased prices to feed cattle was felt by both farmers and by consumers. The price of beef increased to the highest since 1995, the price of ground beef increased by 33 percent from 2013 to 2015 and the price of sirloin steak increased by 44 percent1.

Drought’s economic impact on energy production

Drought impacts both thermal energy production, where there may not be enough water to cool the process, and hydropower production where there may not be sufficient water to produce power.

As an example in Canada, in the Northwest Territories in a regular year, 75% of the power generated is from hydropower. The winter of 2013-2014 received the lowest amount of snowfall on record, this was followed by the driest summer in forty years in 20145,7 leading to less power generation at one of three major hydropower sites.

Due to the decreased energy production there was a shortfall in power across the Territories that needed to be supplemented with diesel power generation. Diesel power generation is more expensive than hydropower generation and increases greenhouse gas emissions during combustion.

The need to supplement power and cover the cost of diesel energy production the Northwest Territories Power Corporation applied to the public utilities board for an emergency rate increase of 3.7 cents per kilowatt hour, a 13% increase in the power rate2, 6. In the end, the $20 million shortfall was paid for by the government of the Northwest Territories2.

Drought Economy DryGround

Another example of drought having a negative financial impact on the energy industry is in 2001, when severe droughts in California and the Pacific Northwest significantly reduced hydropower generation. This resulted in tight electricity supplies and high prices. Power outages were largely avoided, however it is estimated the total regional economic impact of the drought was between $2.5 – 6 billion3.

Drought’s economic impact on recreation and tourism

Drought can also hurt the recreation and tourism industry. Businesses, such as water sport rental shops, maybe financially impacted during a drought. Small businesses near a waterfront or in a vacation town that rely on a steady stream of tourists for business may also lose money.

As climate variability increases in the future, the economic impacts of drought may be more prominent. Droughts can be expensive for consumers with increased food and energy prices, as well as cost the municipality, province and country where they occur. If a drought is severe enough, it may also have an impact on the overall GDP of a nation.