How agricultural lenders can boost climate resilience

Farmers in the U.S. currently face severe challenges including poor economic conditions, extreme weather related to climate change and disruptions from the COVID-19 pandemic. These risks also impact farmers’ financial partners, including agricultural lenders.

While some of these risks are difficult to anticipate and plan for, there are growing opportunities and resources available for farmers and their lenders to better understand their vulnerabilities related to climate change — and take steps to build resilience.

A new report from EDF — Financing resilient agriculture: How agricultural lenders can reduce climate risk and help farmers build resilience [PDF] — describes climate risks to the agricultural lending sector and provides a path forward for lenders to support a more resilient agricultural system.

Key findings

• Climate risks are a blind spot for lenders. The U.S. agricultural lending sector has not proactively assessed its climate risks. This is concerning, as agriculture is on the front lines of climate change and the broader financial sector is making strides in incorporate climate risk into decision-making.
• Climate impacts pose financial risk. Because the agricultural sector faces substantial climate risk, agricultural lenders are also vulnerable. Weather damage reduces farmer earnings and can cause credit quality to decline, especially as weather impacts occur more frequently. Many lenders are also concentrated in agricultural regions and related businesses, magnifying their risk.
• Crop insurance is not enough. While crop insurance is an important shock absorber for participating farmers and their lenders, it is not sufficient to protect farmers, lenders or the broader agricultural economy from climate risk over the long term.
• Current loan offerings don’t value resilience. Short-term financial products such as annual operating loans don’t integrate the value of farmer investments in practices like no-till, cover crops and extended crop rotations that have measurable financial benefits in terms of cost savings and risk reduction. This disconnect undermines long-term profitability and resilience — for both farmers and their lenders.

Recommendations

• Assess climate risk at the lending institution level. Lending institutions should assess their exposure to climate risk and adopt and implement strategies to monitor and mitigate climate risk.
• Understand the role of conservation practices in managing climate risk. Lenders can gain valuable insights on the financial impacts of conservation adoption and learn about strategies to minimize costs and maximize benefits of conservation adoption.
• Develop lending programs or products that support farmers in building climate resilience. Lenders should design lending programs and products to support farmers in transitioning to conservation practices that build resilience — for example, through multi-year loan terms and adjusted repayment periods — and incorporate data on the benefits of conservation practices in credit rating processes.