Agricultural lenders should design their loan programs to encourage farmers' adoption of farming practices resilient to the impacts of climate change, the Environmental Defense Fund says in a new report.

But lenders first need more data so they can understand the “financial benefits of and barriers to resilient agricultural practices” such as cover crops and no-till farming, the report says. They cannot let their “unfamiliarity with conservation practices discourage farmers or increase barriers to lending.”

“We have lots of great anecdotes and we're beginning to see more use of bigger datasets, like USDA datasets, to understand” the dollars-and-cents impacts of resilient farming methods, said Maggie Monast, EDF’s director of economic incentives, agricultural sustainability.

“But there's still a big gap between the information lenders need to make decisions and what's out there,” she said. EDF is recommending that lenders familiarize themselves with current conservation information and “collaborate with organizations like ours” to identify information gaps, she told reporters. 

“Historically, lenders have placed the heaviest weight on farmers’ financial strength and repayment ability,” Idaho farmer and EDF adviser Dick Wittman wrote in the report’s foreword. “Little consideration has been given in credit scoring models to farmers’ conservation strategies or exposure to climate risk. That needs to change.”

EDF, generally regarded as one of the most effective environmental organizations in the country, works with industry, including agriculture companies and associations, and government on a host of environmental issues, including climate change. The report, it said, “is based on extensive research and interviews with a variety of food and agricultural lenders, including Farm Credit and commercial lenders, as well as multiple other relevant experts.”    

In addition to gathering more information about potentially profitable conservation strategies, the report said ag lenders “should assess their exposure to climate risks and adopt and implement strategies to monitor and manage those risks.” The ag lending sector has lagged behind the financial sector in doing so, the report said.

“A 2019 survey of 20 banks and seven other financial institutions found that 55% of mainstream financial institutions are currently taking a strategic approach to climate risk, and 95% aim to implement a strategic approach in the future,” the report said. “Despite this trend, most U.S. agricultural lending institutions have not yet integrated climate risk into their risk management frameworks.”

The report also found that “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.”

National Crop Insurance Services, which represents the interests of private crop insurance companies, said it had not yet read the report but pointed to its website’s “Just the Facts” page, which addresses conservation practices in general.

“The crop insurance industry supports continued agronomic research to determine how farmers can best incorporate cover crops and other Best Management Practices in their operations and to determine what impact those practices may have on the insured crop,” NCIS said. "Farmers interested in exploring how cover crops can fit into their operations are encouraged to discuss all available options with their agronomic advisers and their crop insurance agent to verify their plan follows good farming practices and meets crop insurance requirements.”

Ed Elfmann, the American Bankers Association's senior vice president for agriculture and rural banking policy, said in a statement that "agricultural lenders, like all lenders, are risk managers at their core and are always looking for ways to reduce risk for their customers. While there is still work to be done to understand the threats posed by climate change, we are collaborating with organizations like EDF and working to educate our members to help bridge the gap between financing and climate resilience. Agriculture is constantly evolving, and we look forward to continuing to work with agricultural groups and other stakeholders to do everything we can to help producers succeed.”

The EDF report said “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.”

The benefits of some conservation practices “can take several years to materialize,” the report says. “Practices that build soil health can take several years (for example, three to five years for cover crops) to generate a financial benefit.”

Said Monast: “Lenders are not collecting or looking at farm budgets in a way that would allow them to see the value of resilient farming practices. And when it comes to the short-term focus of nearly all annual operating loans, that focus means that lenders miss longer term value, cost savings, and risk reduction.”

There needs to be more assistance for farmers starting to use more sustainable farm practices, the report said.

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“Some lenders contend that if farmers increase their financial health and stability by using resilient practices, ultimately their lending terms will improve along with the farm’s improved financial performance,” it said.

“However, this is a lagging indicator and does not support farmers in navigating the transition so that they can arrive at the better outcome. Farmers face an additional barrier to conservation adoption when they cannot partner with their lenders to plan for the transition period and take a multi-year view of conservation investments.”

In addition to the difficulty of measuring the benefit of practices that may take years to materialize, the report identifies other barriers to making ag lending more conservation-friendly. One is the need to look at the interaction between farm practices to assess cost savings.

Another is the need to look at the benefits of risk reduction. “The relationship between healthy soils, water management and crop yield resilience is important, as is the opportunity to reduce financial risk overall through crop diversification and cost savings,” the report says. “However, it can be challenging to measure financial benefits that only appear in certain years or under poor weather conditions.”

Keeping accurate records also can be an impediment. “Farm recordkeeping allows farmers to track practice interactions and potential cost savings, and to effectively manage the many variables involved on each farm to achieve the best results,” the report said. “However, comprehensive recordkeeping often is not at the top of farmers’ priorities, especially for those under financial stress or who have less capacity around the farm.”

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