Report: How U.S. Agricultural Lending Can Mitigate Climate Risk and Finance Resilience

(WASHINGTON, DC — Sept. 2, 2020) The U.S. agricultural lending sector is at risk from climate change, according to a new report released today by 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 risk and the value of farming practices that build resilience,” said Maggie Monast, EDF’s director of working lands. “Loan structures and credit review processes don’t incorporate the value of farmer investments in conservation practices that are known to mitigate weather risks, ultimately undermining long-term resilience and profitability for farmers and lenders alike.”

Farm budget analyses demonstrate how conservation practices like no-till, cover crops, extended crop rotations and nutrient management can improve farm resilience by delivering measurable economic value in terms of cost savings and crop yield risk reduction to farmers and their financial partners.

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

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

“Climate change impacts are making food production harder and threatening farmers’ livelihoods,” said Dick Wittman, Idaho farmer and business consultant. “Together, farmers and their lenders have an opportunity to mitigate this risk, enhance operational resilience and ensure agriculture remains economically and environmentally sustainable. This report makes a clear and compelling case that long-term farm profitability is not undermined by near-term investments in conservation and climate resilience — it depends on it.”

Key findings of the report include:

• The U.S. agricultural lending sector has not proactively assessed its climate risks, creating blind spots and lagging behind the broader financial sector.
• 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.
• Current loan offerings do not align with the financial attributes of conservation practices, and therefore create challenges for farmers who use or are considering adopting these practices.

Key recommendations from the report include:

• Lending institutions should assess their exposure to climate risks and adopt and implement strategies to monitor and manage those risks.
• Lenders should seek to gain valuable insights on the farm financial impacts of conservation adoption and learn about farm management strategies to maximize long-term profitability and reduce risk.
• 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.

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