Innovations in economic assessment of drought management: Application to crops and river basins of New Mexico

Drought frequency and intensity have increased in many arid and semi-arid regions, placing growing pressure on irrigated agriculture and basin-scale water management systems. A growing amount of literature documents drought impacts on crop yields and aggregate farm income, but most studies focus on highly aggregated spatial scales or single commodities. As a result, little empirical evidence exists on how realized drought damages vary across river basins, crop systems, and water-supply contexts within a single institutional setting. This study develops a basin-scale, crop-specific economic assessment of drought impacts for New Mexico that integrates observed land-use change with enterprise-level economic data. Using US Department of Agriculture (USDA) Crop Data Layer observations linked with land grant university crop enterprise budgets, it quantifies changes in cropped acreage, production costs, and net farm income across seven major river basins and seven crop classes over the 2017-2019 period using the year 2015 as a baseline for comparison. Drought damages are estimated ex post as deviations from a pre-drought baseline, capturing both extensive-margin adjustments and intensive-margin profitability effects per unit land, while accounting for groundwater as a drought buffer. Results reveal considerable spatial heterogeneity in drought impacts across basins and crop systems. Forage and grain crops experience the largest and most persistent income losses, while higher-value crops such as vegetables and nuts exhibit greater short-term resilience. Groundwater-dependent basins experience amplified income losses due to rising pumping costs, highlighting limits to groundwater-based drought adaptation. These results demonstrate that effective drought management requires basin-specific strategies that account for crop composition and groundwater dependence, rather than uniform statewide drought responses. The framework provides transparent, policy-relevant evidence for basin-specific drought management, groundwater regulation, and irrigation planning in the world's arid, water-scarce regions.