Drought Exposure and Dynamic Input Adjustment in North Central U.S. Agriculture

ABSTRACT This article examines whether realized extreme drought episodes affect the speed of adjustment of derived input demands and output supplies toward their long‐run equilibrium in U.S. agriculture, focusing on states in the North Central Region. Using state‐level data from 1960 to 2015, we estimate a dynamic investment‐demand and output‐supply system based on adjustment cost theory. The results indicate that labor adjusts faster than capital, while land is highly persistent from year to year. Extreme drought is associated with faster capital adjustment, although this evidence should be interpreted as short‐run weather‐related adjustment rather than long‐run climate adaptation. The paper updates the input adjustment literature by showing how realized drought exposure may condition adjustment speeds in a regional agricultural system.