This paper studies the effects of drought shocks in a vulnerable environment – the Brazilian Semi-Arid. We analyze the impact of drought shocks, measured as deviations from historical averages, on agricultural outcomes and land-use decisions in a region that suffers recurrently with drought. After controlling for municipality and year fixed effects, we use weather shocks to exactly identify outcomes. Our benchmark results show substantial effects on the loss of crop area and on the value of agricultural output. By investigating distributional effects, we are able to show that crops related to family farming suffer more from drought shocks. We follow our investigation by testing heterogeneity effects and show that adequate water provision and maintenance of forest cover help in reducing the impact of drought shocks. Finally, we show that drought shocks in the previous year affect deforestation in the following year.

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