Water Risk Assessment Is A New Imperative in Agricultural Lending

The U.N. Global Compact defines water risk as “the possibility of an entity experiencing a water-related challenge,” which can be anything from water scarcity, to flooding, to the depreciation of water resources, and everything in between.

While water issues affect the agricultural industry in multiple ways, one of the most serious is the risk that it puts on loan portfolios. Lenders are an economic driver of the agriculture industry – their loans are a financial support to the farmers and ranchers who feed the world.

With these threats already being stressors, water risk assessment has become a necessity. Without it, it’s difficult for a lender to make an informed decision about whether or not a grower or farming operation will have access to the water it needs to be sustainable amidst current water issues such as drought.

By evaluating a borrower’s water security situation – including what water rights they have access to, the reliability of that water source, and more – lenders can reduce the risk involved in making decisions about agricultural loans.

This post outlines AQUAOSO’s steps for what a water risk assessment entails (featured in ASFMRA’s Water Trends Report), and the four key steps that go into analyzing water risk:

• Identify
• Understand
• Monitor
• Mitigate

By adhering to these best practices, ag lenders can make better decisions and play an important role in transitioning toward more resilient farming methods.

(Part of our Agriculture Loan Guide. Click here to explore the whole guide.)

Identify

The first step toward mitigating water risk is to, of course, first identify it. While that may seem like the easy part, water risk data is often counterintuitive and may even differ from expectations. One Earth sciences professor found that “year-to-year droughts in the western United States were less predictable than previous studies have claimed.”

In fact, the regions that are most vulnerable to drought may not necessarily be the ones that experience it most frequently. States like California have taken steps to mitigate drought risk with regulations like SGMA, which is movement in the right direction in terms of water resilience, but adds its own complications with a bundle of reporting requirements that differ from GSA to GSA. Variations in rainfall and snowpack can also contribute to water scarcity and the confusing nature of collecting the data necessary to assess water risk.

Some of the water security issues to look out for include the following but are not limited to:

• In areas where groundwater pumping is capped, some growers may have to let fields go fallow or plant less water-intensive crops
• In basins are governed by an interstate compact, states may be forced to implement demand management strategies to mitigate drought
• Seasonal variation can result in “a one or more acre-foot per acre swing in surface water supply” in some water districts
• Long-term trends due to climate change may impact water availability and costs

Identifying water risk requires understanding both the macro trends that affect growers around the world, as well as the micro trends that impact specific parcels. Because of the complexity of water security, lenders must prepare for “high uncertainty, high-risk scenario[s]” that will have long-term effects on the agricultural industry.

Understand

Step 2 in performing a water risk assessment is to understand the unique risks associated with a specific region or parcel of land. In many states, this means learning about what regulations are on the horizon and planning ahead to adapt to them.

For example, California’s Sustainable Groundwater Management Act (SGMA) won’t affect all growers in the same way or even at the same time. As each basin rolls out its own Groundwater Sustainability Plan (GSP), some farmers may face limitations on how they can respond to droughts and other adverse weather conditions.

While these changes may improve a farm’s ROI over the long-term, it may also require up-front investments in monitoring and conservation infrastructure. Growers may have to invest in water meters or buy and sell water rights in water markets.

It will no longer be enough to simply understand a region’s drought risk. Lenders must also be aware of what options a farmer has to respond to drought, and what costs – and benefits – are associated with making the shift to more water-resilient farming practices.

Monitor

A useful water risk assessment relies on having access to accurate and up-to-date data. Fortunately, new technologies can provide professionals with many of the data points needed. From irrigation systems to drones that can measure evapotranspiration (EV) data, water data is becoming more plentiful.

Additionally, public and private entities are beginning to realize the importance of data-sharing and collaboration in the water sector. Water data is too important to be siloed. Access to transparent and accurate water data is now an element of the agricultural industry that has the potential to be a driving force for positive change. The ability to monitor trends to assess water risk is a perfect example.

Tools like AQUAOSO’s Water Security Platform are an example of un-siloed access to water data, allowing lenders and other stakeholders to view multiple layers of data on a single map – data that historically would have only been available via time-consuming research or expensive consultants. As Chris Peacock, the founder and CEO of AQUAOSO, explains in a podcast:

“The tools that we’ve built are not just for a really large landholder or a super-wealthy organization – it’s for everybody that works in the system… so that everyone can make better decisions versus just a select few.”

Monitoring water data can take many forms. Whether it’s an individual grower deciding to put a smart meter on a groundwater pump, or a NASA satellite taking photos of the Sierra Nevada snowpack, the more water data available, the better the decisions people make can be. Lenders, in particular, have a key role to play in interpreting this data, applying their experience with risk analysis to the agricultural sector.

Mitigate

Finally, the fourth step is to take the information that’s available and use it to mitigate water risk. Some states are already taking the initiative and rolling out drought mitigation plans or basin-specific conservation strategies. This has spurred interest in innovative policies like groundwater trading and water banking.

While water stress can’t be avoided entirely, there are several policies and practices that can put in place to mitigate it:

• Public and private investors can prioritize investments in water infrastructure, to  ensure a reliable supply of agricultural water in the face of climate change
• Growers can find ways to conserve water in agriculture through the use of new technologies and sustainable farming practices
• Local watersheds can build more flexibility into the water management system, by allowing rights holders to bank, transfer, or store unused water

Lenders can also work to mitigate water risk by factoring water risk assessments into their loan decisions. Rather than approving risky loans, lenders can take a clear-eyed view of a borrower’s water situation and encourage them to address any risk factors.

Not only is sustainable agriculture linked to better ROI, but it can also reduce soil degradation, aquifer depletion, and other effects that are worsening the impact of climate change.

How AQUAOSO can help with water risk assessment

AQUAOSO’s Water Security Platform was designed specifically for agricultural lenders and other stakeholders needing to research and monitor water risk. AQUAOSO has aggregated some of the most important data sets – including over 130+ groundwater plans under SGMA – that can be used to inform lending decisions.

Find underlying data around soil, crop, and water quality, as well as information on water rights, wells, and land ownership. Instead of taking a water rights permit or claim at face value, conduct personal due diligence, and ensure that it’s still valid.

The platform’s other features can help ag professionals acquire more land, enhance existing relationships, and monitor portfolios. For example, the Portfolio Connect tool allows users to track data for a single borrower, or an entire portfolio at once. Sort by risk level, crop types, or water district to compare the concentration of risk within different categories.

In short, AQUAOSO can provide water risk insights at nearly every stage of the lending process. The Water Security Platform can be used to screen acquisition opportunities, assess current properties, or provide third-party reports to support investment decisions. Not only can it help to mitigate financial risks, but it can also help to strengthen relationships with borrowers.

Read more about water risk in agriculture lending in the full guide.

The Bottom Line

Water stress has become a key risk factor for the agricultural sector, as climate change and other issues threaten the agricultural water supply. Performing a detailed water risk assessment is now an imperative when it comes to agricultural lending.

AQUAOSO suggests a four-step process to assess water risk:

• Identify
• Understand
• Monitor
• Mitigate

The Water Security Platform was built to provide the information needed in an easy-to-understand format that is shareable with other stakeholders.

Contact us today to get a free demo of the platform, or browse our resources page to learn more about current issues surrounding water risk!

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