Since the early 1980s, Dale Murden has grown citrus in the tip of southern Texas, where the Rio Grande winds through a sun-baked floodplain across the border into Mexico.
Murden cruises his groves in a John Deere Gator, often accompanied by Blue and Blanca—his “wonder rescue” dogs, as he calls them—past trees he planted years ago. They are just old grapefruit trees, but over the last year they have become battle-tested companions.
They’ve put up a “heckuva fight,” he says.
Last summer, Murden watched as the trees struggled against a massive drought that withered leaves and fruits. Then a hurricane drove thousands of grapefruits to the ground, where they bobbed, unripe and green, in giant muddy puddles. After a freak deep freeze in February, Murden found drifts of nearly-ripe fruit laying useless on the ground, under canopies of browned leaves and frost-split branches.
“I’ve been doing this for over 40 years, and I’ve lived through hurricanes, freezes and droughts,” Murden said. “But never in my life have I experienced all three in one year.”
The deep freeze on Feb. 14, or what Murden jokingly calls the “St. Valentine’s Massacre,” caused at least $600 million in lost crops and livestock.
Murden’s experience may sound extreme, but a string of weather events has battered thousands of his fellow farmers and ranchers across the nation over the past two years: Heavy spring rains that prevented them from planting crops; wildfires in California that devastated wine regions; a destructive “inland hurricane” called a derecho that raked across a central part of the Midwestern Corn Belt.
The intensity, frequency—and cost—of these disasters are all rising, as climate change supercharges dangerous weather across the country’s most productive farming regions. Much of the economic stress has, so far, fallen on farmers and on the taxpayer-funded government subsidies and programs that protect them.
But the billions of dollars in damage caused by the extreme weather could soon rattle or overwhelm the banks and lenders that provide critical cash flow to farmers. And that, in turn, would almost certainly destabilize not only the food supply but the financial systems that underpin the broader global economy, financial analysts say.
In March, the United Nations said that natural disasters are occurring three times more often than they did 40 years ago, and that agriculture bears a disproportionate brunt of the financial damage—more than industry, commerce and tourism combined. The consequences of these disasters, in the United States and abroad, are projected to cascade across the financial system, from big banks to personal retirement accounts.
Over the last few years, financial regulators and leaders have become more vigilant about the risks climate change poses to the world’s financial system. And while U.S. regulators are trailing their counterparts in Europe and elsewhere, they’re starting to ask more urgently that banks examine how climate change could affect their ability to function, and to reveal those risks publicly. In the first months of the Biden administration, financial regulators have started pushing for more action.
At a recent Senate hearing focused on the subject, witnesses laid out stark conclusions. “Climate change poses serious risks, that, if ignored will undermine the financial system’s ability to support the American economy,” Nathaniel Keohane, a senior vice president with the Environmental Defense Fund, said at the hearing.
But while global banks have started to analyze—and disclose—the risks that their investments in fossil fuels pose to their financial health, they have only a flimsy grasp of the risks from their agricultural investments, especially from high-emissions forms of agriculture like meat and dairy production.
“We’re talking about hundreds of billions of dollars at risk here, and it’s not priced in the financial system,” said Bruno Sarda, the former North America president of CDP, a framework through which companies disclose their carbon emissions.
Farmers depend not only on weather but on access to credit—billions of dollars in loans from banks and agricultural lenders to buy seeds, fertilizer and equipment. And climate change is threatening that, too.
The smaller, regional banks that most farmers depend on have been especially slow to understand that climate change poses a risk to their own stability, and by extension, to their ability to lend to farmers.
Some farmers are already concerned that financial lifelines will be tested.
“In our world down here, the farm credit banks are part of what we do,” Murden said. “But this freeze was so widespread, you got to start worrying about the banks.”
Already, increased temperatures across the Midwest, arguably the most productive farming region in the world, have driven down yields. The rising temperatures of coming decades will drive crop yields down further, and are likely to lead to more “multiple breadbasket failures” across the world’s major grain producing areas, according to several recent studies.
Investors, some regulators and lawmakers have been sending warning flares about such dangers for some time. “Despite the predictable nature of these disruptions with respect to climate change, our financial system is flying blind,” wrote Sens. Brian Schatz (D-Hawaii) and Sheldon Whitehouse (D-R.I.), in a letter last year about global warming’s financial impact on all sectors of the economy.
And in a September report, the Commodity Futures Trading Commission, which regulates derivatives markets, including agriculture futures, warned of widespread risk from climate change to the country’s financial system. The CFTC’s report was the first by a U.S. government entity to broadly address the dangers climate change poses to the financial system. Remarkably, it was produced under the Trump administration, which steadily undermined any meaningful attempt to address the climate crisis.
“Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity,” the report said, stressing that this could happen “within a relatively short time frame.”
Concerning agriculture, the report warned: “Financial market participants dealing in agricultural commodities must adapt to this wide range of physical risks by devising new ways to value, price, and manage climate risk.”
Financial leaders group business risks into two broad categories—physical risk and transitional risk. And for agriculture and food producers, these categories apply as aptly as with fossil fuels.
With more extreme weather and climate-stoked shifts in temperature, assets and infrastructure will be damaged, either quickly or over time. The physical risks are especially obvious in agriculture.
Any of the recent disasters puts those risks on clear display. Last summer’s derecho swept across five Midwestern states, flattening corn fields, tearing up trees and ripping roofs off grain bins and barns. In Iowa, which was hardest hit, the storm damaged millions of acres of corn and soy.
“We were in the bullseye. We got clobbered,” said Lynne Schnoebelen, a farmer from Madrid, Iowa. “This thing really did some damage. I still have clean-up to do.”
Many other industries are not as dependent, or vulnerable to, weather.
“Farms are the definition of physical risk,” said Steve Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at the Boston-based financial advocacy group Ceres. “You can’t move a farm, to state the obvious, and you have drought and hurricanes happening more and more across the country.”
Agriculture also faces “transitional” risks that come from a shift to new technologies, increased regulations or changes in consumer demand or pressure.
“Think about what happened to fossil fuel companies, with the whole movement to keep oil in the ground,” said Maria Lettini, executive director of the FAIRR Initiative, an investor network that analyzes risk in animal agriculture. “The oil in the ground was being mispriced. It doesn’t have value. It’s obsolete, and therefore it’s stranded.”
She added, “The same is going to happen for agriculture and animal agriculture.”
As companies comply with government regulation—a price on carbon, for example—or an attempt to meet targets in global emissions reductions compacts, including the Paris climate agreement, that also will add pressure on their bottom lines. Major reports, from the United Nations and the National Climate Assessment, have said that unsustainable agricultural practices and models need to be overhauled to meet global greenhouse gas reduction goals. The attention on the subject could intensify pressure on regulators to take action.
Cattle are a major source of methane and the systems in which they’re raised produce not only methane, but large amounts of nitrous oxide. Both are especially potent greenhouse gases. In a recent analysis, FAIRR found that a carbon tax could cost the world’s 40 largest meat companies nearly $12 billion a year by 2050.
“That’s about 5 percent of each companies’ revenues. That’s big, and that’s something that’s inevitable for a 2 degree scenario,” Lettini said, referring to the 2 degrees Celsius goal of the Paris pact.
The full impact of innovations in plant-based proteins like Impossible Burger and Beyond Meat, which have been phenomenally successful, is not yet completely understood, but financial analysts say is likely to be significant as more people switch to meat alternatives.
“There’s a technological shift, too. We can get our calories from feed rather than feeding the feed to cattle,” Lettini said. “That’s not being fully priced, either.”
Even the United Nations Principles for Responsible Investing says that an “inevitable policy response” would lead to an 80 percent reduction in global meat consumption.
“What investors have not understood is that the existential challenges faced by big oil and gas are similar to big meat and big dairy,” said Daniel Jones, a campaign manager with Feedback Global, a UK-based advocacy group.
Most of the financial risks to banks from food or agricultural companies lurk in the supply chain companies they lend to or invest in. But many of these food and agricultural companies don’t fully disclose the greenhouse gas emissions in their supply chains, which is a measure of the risk they face from climate change.
In a 2019 analysis, the Task Force on Climate-Related Financial Disclosures (TCFD) found that only 26 percent of food and agribusiness fully disclose emissions from their supply chains—known as Scope 3 emissions—and overall “a smaller percentage of agriculture, food, and forest products companies disclosed relevant information than the average across all industries for all 11 recommended disclosures.”
That means banks and lenders haven’t gotten a complete picture of the financial risks their agricultural investments pose.
“The failure of most top food and beverage companies to adequately monitor, disclose on, and reduce scope 3 emissions from agriculture poses substantial material risk,” a 2019 report by Ceres said, “particularly in light of the growing necessity to assess and address threats and opportunities in exposure to the impacts of climate change, and increasing stakeholder demand for greater corporate transparency…”
A Threat to Lenders
In the spring of 2019, torrential rains deluged farms across the Midwest, making it impossible for farmers to plant their crops.
Later that year, the Federal Reserve Bank of Chicago reported that nearly 70 percent of banks’ farm customers were affected by the flooding and that more farmers were having trouble paying back their loans than at any point in the previous 20 years.
Regional agricultural banks and lenders within the Farm Credit System, a government-sponsored network of lending cooperatives, provide most of the credit to American farmers, more than $400 billion in 2019.
But these banks have done little to no assessment of climate risks, according to an analysis by the Environmental Defense Fund (EDF), even though the huge losses from flooding and other extremes are predicted to become more common.
“Lenders could both suffer losses from impaired loans and perhaps be less able to provide credit to borrowers,” the authors wrote. “Despite these risks, there is little evidence of proactive climate risk assessment by U.S. agricultural lenders.”
And because they specialize in agriculture lending, lenders are uniquely at risk as climate-induced weather batters farms and ranches.
“Agricultural lenders are often concentrated in agricultural regions and with agricultural businesses that have very concentrated risk,” said Maggie Monast, director of working lands for EDF. “So essentially, if those lenders become credit-stressed, then farmers may not have the same level of access to credit and that’s a problem because farmers need credit to plant their crops.”
Meanwhile, the Biden administration has said it wants to help farmers build healthier soils that store carbon more effectively, so that they can participate in a voluntary carbon market backed by the U.S. Department of Agriculture. At President Joe Biden’s Leaders Climate Summit in April, U.S. Agriculture Secretary Tom Vilsack announced a series of climate-focused initiatives designed to help farmers meet the newly released U.S. pledge to cut greenhouse gas emissions 50 percent by 2030.
But if the Farm Credit System or regional banks become unstable or insolvent, that opportunity could shrink.
“Lenders and farmers ultimately share an interest in the financial stability and resilience of farms, and there’s a lot of farming practices and management changes that can help farmers build resilience,” Monast said. “Both climate and financial resilience. There’s a huge opportunity.”
The Farm Credit Council, which represents lenders in the Farm Credit System, declined to comment for this story.
Stability of the Supply Chain at Risk
While regulators in the United Kingdom and the European Union have taken strong steps to face the challenges that climate change poses to their financial systems, regulators in the United States are far behind, and have not only ignored the risks but hobbled the ability of investors to pressure companies to act.
Under the Trump administration, the Securities and Exchange Commission (SEC), created to ensure transparency in the financial system, failed to enforce guidelines or develop rules that would ensure that banks assess climate risks.
“They systematically dismantled the ability to bring companies to recognize climate change,” said Danielle Fugere, president of As You Sow, a shareholder advocacy group.
But the Biden administration has swiftly started to undo some of the Trump administration’s work on climate and finance.
Even before Biden took office, the Federal Reserve Board joined the Network of Central Banks and Supervisors for Greening the Financial System, a group that works to develop risk management strategies for financial institutions.
In March, the CFTC announced a specialized Climate Risk Unit and the SEC asked for public input to help develop a rule requiring companies to disclose information on climate risks.
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In November, the U.K. government said that by 2025, companies will be required to disclose climate risks to their businesses, making it the first government in the world to do so. In the weeks leading up to the April climate summit, the Biden administration signaled it may follow suit.
Still, some analysts note that much of the investment in agricultural commodities comes from private equity firms, which largely operate beyond the reach of regulators. In a recent report, the advocacy group GRAIN said that private equity accounts for $4 trillion in assets across all industries, but $300 billion of that is tied up in agriculture.
The Farm Credit System, which accounts for about 40 percent of all farm loans, is overseen by the Farm Credit Administration, which has not been the subject of the new administration’s scrutiny and is overseen by the agriculture committees in Congress, not those that focus on banking. In the September CFTC report, the commission recommended that the Farm Credit System and similar government enterprises review their climate risks and develop plans to address them. The credit system has not yet done so.
To get a loan, farmers need to have a crop insurance policy. These policies, largely, have protected farmers from the losses they suffer from increasingly damaging weather and have meant that the farming industry, as a whole, hasn’t yet felt the full economic impacts of climate change. In fact, thanks to crop insurance and to bailouts in recent years, farm income is actually up.
“You look at the drought in the West and the derecho—there would have been significant financial impacts, but a lot of that was offset by indemnity payments,” said Chad Hart, an economist at Iowa State University. “But as we have more and more negative weather events, that will mean lower coverage and higher costs to maintain that coverage.”
Ultimately, banks may start to deny loans, which could threaten their own survival.
“You have this built-in feature with crop insurance helping offset some of the risk that lenders face,” Hart said. “What climate change and the trends we’re seeing would suggest is that coverage is going to be more costly and there’s going to mean harder negotiation between farmers and lenders.”
According to an analysis by the Institute for Agriculture and Trade Policy (IATP), insurance policy premiums could eventually become so expensive that farmers will drop their coverage.
That, says IATP’s Steve Suppan, puts “the longer term stability of the food and agriculture supply chain at risk.”
For farmers these concerns are becoming less of an abstraction.
“I don’t know how long the insurance companies can continue to suffer the losses and still be able to cover everything,” said Larry Ginter, a retired farm from Rhodes, Iowa.
A Partisan Divide
During the four years of the Trump administration, financial regulators and agencies were discouraged from assessing climate risk. Economists say that needs to change across all industries, including agriculture.
Now it’s time to catch up.
“The banks should be doing this,” said Silvia Secchi, a professor of geography and sustainability science at the University of Iowa. “If not the banks, then the USDA.”
But an overhaul of financial regulations in the United States is likely to face significant resistance.
A recent Senate Banking Committee hearing on climate-related risks to the financial sector gave a preview of the partisan divide over the issue, a gap that essentially mirrors the partisanship over climate change writ large.
Sen. Pat Toomey, the ranking Republican from Pennsylvania, said in his opening remarks that any attempt to require climate disclosures or any kind of analysis of climate risk would stray beyond the confines of financial regulation. He called recent remarks from SEC acting chairwoman, Allison Herren Lee in which she discussed mandatory disclosure of climate investments, “chilling and authoritarian.”
“The real objective here seems to be to punish politically disfavored industries,” Toomey said. “By straying beyond their mandate into the climate arena, financial regulators will pressure banks not to serve politically disfavored industries, such as fossil fuel companies. Well, what’s next: Gun manufacturers? Conservative media? Religiously minded businesses like Hobby Lobby? This is a wholly inappropriate use of financial regulation in an attempt to substitute political favoritism for private business decisions.”
Meanwhile, many regulators, some lawmakers and green investment groups continue to stress the urgency of more stringent disclosure and transparency.
“We can’t protect the economy—and the people who make it work—if we don’t start by identifying the risks,” said. Sen. Sherrod Brown, the Democratic chairman of the banking committee. “We know far too little about how much climate-related risk is sitting on the books of banks and insurance companies.”
And in many cases, those institutions reveal less information about their investments in agriculture and food systems, despite the particular risks from climate change.
“Most of the attention has been on other emissions intensive sectors, but if we’re talking about risk we need to be thinking about what sectors are most at risk,” Monast said. “Agriculture depends on natural resources and predictable weather to produce crops and for all of us to have food, and it’s a very at-risk sector from climate change.”