Report: How US Agricultural Loans Can Reduce Climate Risk and Reduce Financial Resilience

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(WASHINGTON, DC – September 2, 2020) The U.S. farm credit sector is at risk from climate change, according to a new report released today by the Environmental Defense Fund. Financing Resilient Agriculture: How Agricultural Lenders Can Reduce Climate Risk and Help Farmers Build Resilience.

“Agricultural lenders have a blind spot when it comes to climate risks and the value of resilient farming practices,” said Maggie Monast, EDF director of labor lands. “Credit structures and credit screening processes do not take into account the value of farmers’ investments in conservation practices that are known to mitigate weather risks, which ultimately undermines long-term resilience and profitability for farmers and lenders alike.”

Farm budget analysis shows how conservation practices such as no-till, catch cropping, extended crop rotations and nutrient management can improve farm resilience by delivering measurable economic value to farmers and their financial partners in the form of cost savings and reduced crop risk.

“Despite the financial benefits of conservation practices, the short-term focus of annual credit review cycles misses out on longer-term cost savings and risk mitigation opportunities from these investments,” said Monast. “In view of increasingly extreme weather conditions and volatile markets, the reduced risk and the reduced added value of conservation practices must be recognized, assessed and incorporated into the decision-making and loan design of agricultural lenders.”

The report includes recommendations for better matching current loan offerings with the financial characteristics of conservation practices in order to remove barriers to farmers’ adoption. Supporting this transition will make farmers and their financial partners more resilient to climate change.

“The effects of climate change are making food production difficult and threatening farmers’ livelihoods,” said Dick Wittman, an Idaho farmer and business consultant. “Together, farmers and their lenders have the ability to mitigate this risk, improve operational resilience and ensure that agriculture remains economically and environmentally sustainable. This report makes it clear and compelling that long-term farm profitability will not be undermined by short-term investments in conservation and climate resilience – it depends. “

The main findings of the report include:

  • The US agricultural credit sector has not proactively assessed its climate risks, creating blind spots and lagging the financial sector as a whole.
  • While crop insurance is an important shock absorber for participating farmers and their lenders, it is not enough to protect farmers, lenders or the general agricultural economy from climate risks.
  • Current loan offerings do not match the financial characteristics of conservation practices and therefore pose challenges for farmers using or considering adopting these practices.

The main recommendations of the report include:

  • Credit institutions should assess their exposure to climate risks and define and implement strategies to monitor and manage these risks.
  • Lenders should seek valuable insight into the financial impact of conservation on farms and learn about farm management strategies to maximize long-term profitability and reduce risk.
  • Lenders should design loan programs and products to help farmers transition to more resilient conservation practices – for example, multi-year loan terms and adjusted repayment periods – and incorporate data on the benefits of conservation practices into credit assessment processes.

For more information on this report, see edf.org/aglending.

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