Executive Summary
U.S. agricultural financial policy and institutions, both public and private, have not yet adapted to climate change. Instead, Congress responds to more frequent extreme weather events with larger and increasingly frequent ad hoc disaster payments and increasing subsidies for private crop insurance from taxpayer funds. These short-term responses are not sustainable fiscally, economically or environmentally.
This white paper summarizes how segments of U.S. agricultural and agribusiness finance could modify their policies and financial products to adapt to climate change in their own operations. Making agriculture finance climate resilient will enable farmers, ranchers and other clients to reduce greenhouse gases (GHGs) which have a global warming effect that drives extreme weather events. Climate-resilient finance will help farmers and ranchers adapt their operations and production practices to climate change trends over the short, medium and long term. This paper explores reforms in five segments of finance related to agriculture and agribusiness: crop and livestock insurance; loans; bonds to finance agricultural lending; agricultural price benchmarking commodity futures markets; and agribusiness financial disclosures to investors.
The contractual terms of agricultural insurance policies, loans and bonds must be modified to help farmers and ranchers reduce GHG emissions and adapt to climate change trends and events, making their operations more financially and environmentally sustainable. The trading of agricultural contracts in the futures and options markets requires climate-related regulations to help make futures prices into more reliable price benchmarks for the forward contracting of crops by farmers with their grain elevators. Agribusinesses should disclose climate-related financial risks and opportunities to investors and lenders to make their operations and supply chains financially, operationally and environmentally sustainable. Changes to Securities Exchange Commission (SEC) rules will be required to make those disclosures clear, comprehensive and comparable.
U.S. agricultural production usually begins not just with the assurance of taxpayer support from the Farm Bill, but with a loan from a local lender that likely belongs to either the federal Farm Credit System or Federal Deposit Insurance Corporation regulated private “farm bank” competitors. Both federal and private agricultural finance will become financially unstable if their risk assessments, credit policies and bond issuance terms continue to avoid internalizing climate change risks and costs. An increasing share of debt that cannot be repaid and eroding asset values are among the indicators of this financial instability.
The U.S. Department of Agriculture Risk Management Administration (RMA) regulates federally subsidized private crop insurance agencies. For most farmers, a crop insurance policy from such an agency is an important form of collateral to obtain agricultural loans. The RMA has not begun a rulemaking process to require private insurers to incorporate climate change risks into the calculation of policy premiums and indemnification rates for crop losses. If these risks are not internalized in insurance policies and pricing, premium rates will increase and indemnification rates will decrease, as climate change drives more severe and widespread damage from extreme weather events to agricultural production. If the price of insurance increases while the insurer’s liability falls, the resulting decrease of farmer participation in crop insurance could make certain crops uninsurable in some parts of the nation.
Another form of a farmer’s agricultural finance is to forward contract a crop with a grain elevator well before harvest to protect against a price fall in commodity futures markets, such as the Chicago Board of Trade (CBOT). The Commodity Futures Trading Commission (CFTC) regulates market participants and futures contracts, such as the globally price influential CBOT No. 2 yellow corn contract. The CFTC is studying how climate change will impact the deliverable supply of commodities, a critical factor in the design of futures contracts. The agency should modify CFTC rules and market data surveillance to help prevent massive market disruptions and contract defaults of market participants due to failure to incorporate climate risk weighting into trading strategies. These modifications would help make futures prices more reliable benchmarks for the setting of forward contracting prices by grain elevators and other first points of sale, such as livestock auctions.
Farmers and ranchers work in the value chains of transnational agribusiness corporations, including seed and pesticide firms; meat, poultry and dairy processors; farm machinery companies; and data collection and analysis firms, all of them claiming to be “climate smart.” These agribusiness companies are among the thousands of transnational corporations that do not disclose quantitatively their climate-related financial risks to investors, lenders and credit rating agencies as “material risks” to their operational and financial viability.
In general, the SEC does not comprehensively enforce “material risk” disclosure requirements. The SEC exempts privately held firms, which outnumber SEC registered companies on stock exchanges by 2-to-1, from registration and disclosure requirements. Current proposed climate financial risk disclosure legislation should be amended to mandate the SEC to require private equity owned companies, as well as publicly listed firms, to disclose climate-related financial risks with a robust enforcement mechanism to ensure compliance. Otherwise, climate disclosures, including reporting of corporate planning to adapt to climate change and reduce GHG emissions along their supply chains, will remain ineffective. Weak or “greenwashed” climate financial disclosures will delay robust climate policy action and contribute to radical climate instability, damaging both public and corporate interests.
Agricultural Finance for Climate Resilience _ IATPDr. Steve Suppan is a policy analyst at the Institute for Agriculture & Trade Policy.
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