How do rural households in China adapt to extreme heat?

Climate change is expected to cause more frequent and severe extreme heat events, which could significantly harm the production of heat-sensitive crops such as corn (Schlenker and Roberts 2009). These events are particularly concerning because they not only pose a threat to global food security due to the potential for heat-induced production losses, but also have profound implications for the income of billions of smallholder farmers who rely on crop production, especially in developing countries.

Recent research has highlighted that, when faced with extreme heat, subsistence farmers often resort to costly productive adjustments within the crop-growing season in order to mitigate production losses related to heat (Jagnani et al. 2021, Aragon et al. 2021). However, our study, Cui and Tang (2024), reveals very different behavioural responses to extreme heat among smallholders in rural northeast China. These new findings provide valuable insights on how to enhance climate resilience for agricultural-dependent rural households in developing countries.

Extreme heat reduces agricultural returns but consumption remains unchanged

We utilise the concept of harmful degree days (HDD) to quantify extreme heat, a metric widely recognised in agronomy for its ability to capture the adverse effects of elevated temperatures on crops. Specifically, in our study, HDD represents the cumulative exposure to temperatures above 32 degrees Celsius during the corn growing season. This threshold is based on plant science evidence, which shows that corn growth is significantly impaired when air temperatures rise above 32 degrees Celsius. Between 2004 and 2014, rural households in northeast China experienced an average HDD of approximately 1.3 degree days, with some locations and years exceeding 10 degree days.

Our findings reveal that an increase in HDD has a detrimental effect on the economic returns from corn cultivation. Specifically, an additional HDD leads to a 5% reduction in corn yields and a 3% decrease in household farm revenue. Despite the significant economic losses incurred by extreme heat, the living standards of corn-growing households remain unaffected. Our analysis shows that increased HDD does not lead to any significant changes in their consumption of food, clothing, energy, living services, interhousehold transfers, etc. Furthermore, the effects of extreme heat on their future expenditures are minimal. These findings suggest that these households are able to achieve consumption smoothing almost perfectly despite the challenges posed by extreme heat.

Figure 1: HDD impacts on households consumption

How do rural households smooth their consumption?

Consumption smoothing often involves leveraging certain buffering mechanisms to mitigate the impact of transitory income shocks. For instance, a well-functioning credit market can offer crucial support to rural households affected by extreme heat, enabling them to borrow money and smooth out their income fluctuations over time. However, between 2004 and 2014, credit markets in rural northeast China were still relatively underdeveloped. Only 10% of the surveyed respondents engaged in credit market activities. Our analysis also indicates that experiencing extreme heat does not significantly influence the decision to take up loans or the extent of loan utilisation.

Instead, these households rely on their own assets to buffer against the effects of extreme heat, primarily using their cash savings and corn stocks. Our findings suggest that in years with higher HDD, corn-growing households reduce their cash savings and corn stocks significantly. The reduction in cash savings directly offsets part of the income decline from agricultural activities, while the decrease in corn stocks further compensates for the shortfall in marketable corn outputs.

Notably, when it comes to the types of savings utilised for consumption smoothing, these households prefer using readily accessible cash over bank savings. This preference likely stems from the limited flexibility rural households have in withdrawing deposits from formal banking institutions, reflecting the underdeveloped rural financial sector in China.

Consumption smoothing disincentivises within-season productive adjustments

The consumption smoothing mechanisms employed by corn-growing rural households in northeast China have proven to be highly effective in dealing with extreme heat events. Through a decomposition analysis, we demonstrate that cash savings alone can offset approximately half of the revenue losses caused by extreme heat, with corn stocks making up for another one-third.

Figure 2: Decomposition of the mitigating effects of cash savings and corn stocks

Given the sufficient buffer provided by these assets, the households have little incentive to adjust their production practices within the growing season. This finding is in stark contrast to the findings from previous studies conducted on low-income, corn-growing rural households in Africa and Latin America. For example, households in West Kenya modify their use of agricultural chemicals during the growing season in reaction to high temperatures (Jagnani et al. 2021), while those in rural Peru allocate additional land within the same season to offset heat-induced yield losses (Aragon et al. 2021). In northeast China, however, we observe no such adaptive behaviours. Additionally, there is no evidence that Chinese households respond to extreme heat by altering their use of agricultural labour, power, or irrigation.

Forward-looking behaviour and income smoothing

In rural northeast China, while immediate productive responses to extreme heat are not evident, we observe adjustments in the years following such events. Specifically, households practicing multi-cropping tend to decrease their allocation of land to corn and increase it for crops that are more resistant to heat, despite these alternatives yielding lower revenue per acre. This shift in crop composition can be seen as a form of self-insurance, with households trading a portion of their potential crop revenue for a reduced risk of heat-induced economic losses, in anticipation of future extreme heat events.

This forward-looking approach extends beyond production strategies to include asset-management behaviour as well. After experiencing extreme heat, affected households are found to actively rebuild their buffering assets, such as cash savings and corn stocks, in preparation for possible future income shocks. Coupled with adjustments in crop mix, these actions demonstrate a significant commitment by rural households in northeast China to smooth their income, especially in the context of insufficient rural financial services.

Figure 3: Rebuilding buffering assets after extreme heat

Concluding remarks

Our research highlights the critical role of liquid financial assets and buffer stocks in aiding rural households to cope with production losses caused by extreme heat. These findings, in a novel context, echo earlier studies on consumption smoothing in rural villages (Saha 1994, Park 2006, Beegle et al. 2006). In rural areas of northeast China, the reliance on cash savings and corn stocks is likely because of the absence of well-functioned financial services and instruments. Although this form of self-insurance has been effective, it may not be sustainable under climate change. With extreme weather events expected to become more frequent and climate-induced economic shocks potentially occurring in successive years, the necessity for enhanced access to financial services becomes apparent. In the long term, a more developed rural financial sector could significantly alleviate household credit constraints and facilitate investments in production adjustments for better climate resilience.

References

Schlenker, W and Roberts, M J (2009), "Nonlinear temperature effects indicate severe damages to US crop yields under climate change", Proceedings of the National Academy of Sciences, 106(37): 15594–15598.

Jagnani, M, Barrett, C B, Liu, Y, and You, L (2021), "Within-season producer response to warmer temperatures: Defensive investments by Kenyan farmers", The Economic Journal, 131(633): 392–419.

Aragón, F M, Oteiza, F, and Rud, J P (2021), "Climate Change and Agriculture: Subsistence Farmers’ Response to Extreme Heat", American Economic Journal: Economic Policy, 13(1): 1–35.

Cui, X and Tang, Q (2024), "Extreme heat and rural household adaptation: Evidence from Northeast China", Journal of Development Economics, 167: 103243.

Saha, A (1994), "A two-season agricultural household model of output and price uncertainty", Journal of Development Economics, 45(2): 245–269.

Park, A (2006), "Risk and household grain management in developing countries", The Economic Journal, 116(514): 1088–1115.

Beegle, K, Dehejia, R H, and Gatti, R (2006), "Child labor and agricultural shocks", Journal of Development Economics, 81(1): 80–96.