Managing climate risk is good business and good for the future

With a wave of the baton, you are the head of the agricultural credit system.

You manage a portfolio of 592,000 agriculture-related clients holding 946,119 loans totaling $ 315 billion, including $ 113 billion in real estate debt alone, according to FCS data from December 2020. These numbers keep most people from sleeping at night. but you sleep like a baby because your staff understand the risk and how to “price” loans based on the five Cs of the loan: collateral, principal, character, capacity, and terms.

Recently, however, a sixth and a seventh “C” has lengthened your sweatier days and nights: climate change.

How do you factor into your loans the unknown damage hurricanes, floods, droughts, harsher winters, and hotter, larger and more frequent growing seasons will have on agriculture?

The only solace you have found so far is that you are not alone. Other agricultural lenders like commercial banks, insurance companies and the US Department of Agriculture’s Farm Service Agency are also looking for answers.

Fumbling

In fact, all of them have been fumbling for years, notes Dr Steve Suppan, senior policy analyst at the Institute of Agriculture & Trade Policy, in a detailed report titled “Agricultural finance for climate resilience,” released last fall.

Worse yet, the best answers to date – “larger and more frequent ad hoc disaster payments and growing subsidies for private crop insurance out of taxpayer funds” – are clearly “not”. viable from a budgetary, economic or environmental point of view ”.

Reform

Still, a reformed federal crop insurance program could be a key part of a new climate flexible loan program. The reason is obvious: the need is so great – there was $ 83.5 billion in “weather and climate (losses)” from 2001 to 2016 – that only government can manage the risk.

More importantly, Suppan explains, “Crop and livestock insurance policies could be written… to reduce premiums and increase compensation payments for farmers and ranchers complying with practices… to reduce sources of harm. greenhouse gas emissions. “

The reverse could also become law: insurance premiums will increase and coverage will decrease for farms, which will exacerbate climate problems. It is a smart government; much smarter, in fact, than signing up to dubious carbon sequestration programs that the big farm groups are pushing now.

Lenders have other ways to encourage climate-friendly and therefore loan-friendly agriculture. For example, explains a recent report titled “Financing Resilient Agriculture” from the Environmental Defense Fund, “Lenders can set differential interest rates” – which means lower rates – “for loans … to farmers with attributes positive ”such as climate-friendly practices.

At present, however, “lenders have a blind spot when it comes to understanding the links between conservation adoption and farm finances”, especially with carbonated livestock production methods. Big Ag. This is something Congress can resolve quickly, if it commits to ensuring climate resilience in the coming decade.

Government sponsored

For example, since the agricultural credit system is a GSE or a government funded enterprise, it receives business benefits due to its special status. As such, Congress could ask him to make climate-friendly loans the norm for all loans to farmers, ranchers, cooperatives and rural communities.

Congress could ask the USDA to do the same for its direct agricultural loans, estimated at $ 17 billion in 2018. If commercial lenders were added, Congress could influence an additional $ 170 billion in agricultural loans.

To get an even greater impact of climate change for their dollars, Congress (and lenders) could offer even larger loans and larger federal crop and livestock insurance grants to farmers who add (or add to) ) a complementary crop / grazing / livestock farm or ranchers business to maximize climate change mitigation.

Other actions

There are other actions that affect the climate that lenders could take – making soil health a measure in loan appraisals, putting drinking water incentives in loans, directing borrowers to loans. relationships ”in the longer term – to make agriculture more climate-friendly and more sustainable.

Whatever action is taken, it must be done quickly; there is no time to waste on false solutions to real problems. And farmers and ranchers should flock to join if, that is to say, they really hope to live out their belief as “early environmentalists.” Plus, it’s a steal now, and decades from now.

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