Farm Credit CEOs discuss emerging opportunities to finance resilient agriculture
Climate change is already impacting farmers, both through extreme weather events and more variability in temperature, rainfall and pests. At the same time, farmers and the broader agricultural system can provide climate solutions and build resilience to reduce climate-related risk.
This dual opportunity has implications for the entire agricultural system, including the agricultural lenders who finance farms.
Loans are essential for many farmers, and agricultural lenders offer credit for land, equipment or annual expenses such as seed and other inputs. Forty-one percent of U.S. agricultural debt, approximately $150 billion, is provided by the Farm Credit System. Farm Credit is cooperatively owned, and its lending associations provide loans directly to half a million farmers across the country.
Executive-level engagement on climate resilience will be essential for agricultural lenders to meet the needs of farmers and seize opportunities to benefit their borrowers. At the same time, lenders face constraints on what they can do — for example, they cannot require their borrowers to implement specific farming practices.
I had the opportunity to speak with 30 Farm Credit association CEOs about these barriers and identify three key areas where these financial leaders are well-suited to engage in efforts to build climate resilience.
1) Promote learning and quantification of financial impacts of conservation practices.
EDF’s work in agriculture finance began when some of our farmer advisors asked us to examine the farm financial impacts of soil health practices like no-till and cover crops, which have environmental benefits and can also improve the resilience of crop yields to variable weather. We partnered with an agricultural accounting firm to examine the financial records of farmers who have adopted these practices in the Midwest.
The findings were striking. Farmers who adopted soil health practices were able to increase their profitability, but they had to navigate a challenging transition period. For example, farmers who used cover crops for five years or more saved over $50 per acre compared to farmers in their first few years of cover crop adoption.
Several CEOs remarked that this type of data and analysis is essential for lenders to understand the benefits and barriers to farmer adoption of practices that build resilience. They asked whether there were analyses tailored to their own regions and production systems.
In regions where there are gaps, lenders can help identify farmer leaders, learn from their best practices that boost both climate resilience and profitability, and conduct similar analyses to understand the financial impacts of those practices. There are also opportunities to collaborate with land grant universities that provide farm financial analysis and recordkeeping support to farmers.
2) Develop lending products or programs to support farmers interested in building resilience.
Armed with data on the benefits and barriers to farmer adoption of practices that build resilience, lenders can then consider their role in tailoring their financial offerings to support farmers in successfully adopting those practices.
There are several existing programs and products that can serve as models for these efforts. For example, Farm Credit’s young, beginning and small farmer programs help meet the needs of farms looking to grow, often by combining business planning support with accommodations in loan terms.
Similarly, a few agricultural lenders now offer organic transition loans, which have altered terms to help farmers through the three-year transition period to organic certification, in which new costs are incurred but farmers cannot yet sell their products with the higher organic premium price.
These examples show that lenders have a history of designing solutions to support farmers in achieving their goals. These skills can be applied to supporting farmer adoption of practices that build resilience and helping farmers navigate potential challenges during the transition period — two key ways lenders can bolster the long-term economic viability of farms.
3) Prepare for climate policy and engage in policy development.
Agricultural lenders like Farm Credit operate at the intersection of federal financial policy and agriculture policy, and there is momentum building on both fronts to address climate risk.
Federal financial regulators are sending strong signals for financial providers to increase assessment and disclosure of climate risks. As a sector dependent on natural resources and predictable weather conditions, agriculture is particularly vulnerable to climate risks. Yet our research found the U.S. agricultural lending sector has not proactively assessed its climate risk. The Farm Credit System will need to close this gap quickly to meet growing expectations for climate risk assessment and disclosure.
Agricultural climate policies are also emerging as a clear priority on Capitol Hill. The Farm Credit Council, which represents the Farm Credit associations in policy discussions, recently joined the Food and Agricultural Climate Alliance, an unprecedented collaboration of industry and environmental groups working to develop and promote shared climate policy priorities across the agriculture, food and forestry value chains. As part of this coalition Farm Credit Council and EDF are already advocating for new farm income streams generated by climate policies to be predictable and measurable so that they can be incorporated into lending considerations.
While conversations about climate change are still challenging for many farmers and lenders, my discussion with Farm Credit CEOs showed that finding common ground and shared interests is possible. Financial leaders’ engagement and action on these climate risks and opportunities will make all the difference for farmers’ ability to rise to today’s challenges and maintain successful farms long into the future.