Assessing the economic impacts of drought from the perspective of profit loss rate: a case study of the sugar industry in China
Natural disasters have enormous impacts on human society, especially on the development of the economy. To support decision making in mitigation and adaption to natural disasters, assessment of economic impacts is fundamental and of great significance. Based on a review of the literature of economic impact evaluation, this paper proposes a new assessment model of economic impact from drought by using the sugar industry in China as a case study, which focuses on the generation and transfer of economic impacts along a simple value chain involving only sugarcane growers and a sugar producing company. A perspective of profit loss rate is applied to scale economic impact with a model based on cost-and-benefit analysis. By using analysis of "with-and-without", profit loss is defined as the difference in profits between disaster-hit and disaster-free scenarios. To calculate profit, analysis on a time series of sugar price is applied. With the support of a linear regression model, an endogenous trend in sugar price is identified, and the time series of sugar price "without" disaster is obtained using an autoregressive error model to separate impact by disasters from the internal trend in sugar price. Unlike the settings in other assessment models, representative sugar prices, which represent value level in disaster-free condition and disaster-hit condition, are integrated from a long time series that covers the whole period of drought. As a result, it is found that in a rigid farming contract, sugarcane growers suffer far more than the sugar company when impacted by severe drought, which may promote the reflections on economic equality among various economic bodies at the occurrence of natural disasters.