What Agriculture Financial Business Risk Intelligence Should Include in 2021
Business risk in agriculture comes in many forms, including production risk due to crop failure or adverse weather events, and market risks due to falling commodity prices or higher input costs. Climate change is introducing more uncertainty into the equation, especially when it comes to agricultural water risk.
This can result in serious information gaps for ag finance professionals, who now need more advanced data collection, management, and analytical tools to make informed decisions about business risk. By using modern business risk intelligence tools and GIS technology to unlock advanced risk analytics, ag lenders and investors can make better use of their existing datasets and incorporate new sources of information into their decisions.
This post will take a look at what ag finance business risk intelligence should include in 2021, and how GIS platforms can streamline the risk analysis process.
Water Stress and Land Value
When it comes to business risk intelligence in agriculture, land, and water are inherently linked. As a recent report by AQUAOSO and Cal-ASFMRA (the California Chapter of the American Society of Farm Managers and Rural Appraisers) puts it:
“[D]uring times of regulation-provoking water stress, high-value farmland must have access to a viable source, quantity, and quality of water.”
Without access to reliable water resources, a farming operation is more vulnerable to drought or reduced water availability due to regulations like SGMA. According to an analysis by Ceres on Financial Risks in Agricultural Supply Chains:
“[Traditional strategies] are becoming less effective in managing supply volatility in an era of climate change and increasingly erratic weather patterns…. [G]roundwater depletion and soil erosion are further compromising agricultural productivity.”
Not only can this kind of water stress negatively impact crops, but it can also have an impact on farmland economics. Water stress can change the competitive landscape of a farming region and reduce the value of farmland, diminishing the value of individual parcels of land in a lending or investment portfolio. As a result, proper asset valuation in ag lending needs to be built on geospatial data in order to account for these risks.
Water Stress and Business Risk Intelligence
Understanding how water risk impacts a loan portfolio can be a nebulous process, but it starts by ensuring that bank data is contextualized in order to reflect on-the-ground risk. Without access to additional data on water rights, water delivery data, and other normally siloed information that exposes water risk on a parcel-by-parcel basis, ag lenders and investors can’t account for the true risk in their portfolios.
Agriculture financial business intelligence must include technology that puts portfolio and bank data into the context of water and climate risk. Tools like GIS Connect can streamline that process by aggregating multiple data sets and integrating them into existing bank data in an easy-to-navigate, purpose-built, geospatial format.
By improving workflow management, loan decisioning, and ESG reporting, geospatial tools can address some of the limitations of traditional business risk intelligence, and approach current problems with capable solutions.
Using Business Risk Intelligence to Avoid Loan Defaults
The business risks facing agricultural professionals aren’t limited to short-term water stress. A report in Agricultural Systems notes that “risk outcomes can have cascading effects where one type contributes to another type occurring—for example, excessive rainfall during harvest is an event that can engender another set of risks such as financial risks associated with being unable to repay loans.”
In order to reduce the risk of loan defaults, ag lenders and financial institutions must rethink their loan decisioning process.
Traditional methods of loan decision-making focus on the borrower’s financial risk, but modern risk decision-making requires a deeper understanding of drought, flood, and wildfire risk, as well as new pumping restrictions, water delivery cuts, and reporting requirements that apply in some farming regions.
The AQUAOSO/ASFMRA report shows the impact of water stress and regulations on farmland economics, using two California counties as a case study:
“The findings show that farmland with access to water through exchange contractor districts or water districts boast higher values than farmland that gets its water from USBR Water or well water…. [L]and valuations correlate with the fact that viable access to water increases a farm or parcel’s ability to produce a continuous profit.”
In other words, if a borrower doesn’t have enough sources of water to turn to in times of drought, they’re more likely to have reduced crop yields and, ultimately, default on their loans.
If an agricultural operation does not have sufficient infrastructure or farming practice in place to boast resilience to drought, flooding, reduced water deliveries, groundwater pumping restrictions, and other risks brought on by climate change, they are a liability in a financial portfolio.
Business risk intelligence can shed light on where a borrower’s water is coming from – as well as any restrictions that might limit their water access even further – and can be an invaluable tool in reducing the impact of water stress on a loan portfolio.
Using Business Risk Intelligence to De-Risk and Build Resilience
With the business risk intelligence tools, ag lenders and investors can centralize their data – both third-party and proprietary – and use it to build resilience in the face of a changing regulatory and environmental landscape. As Ceres explains, the ag sector runs the risk of market and reputational risks, and even litigation, as regulators and investors put pressure on financial institutions to disclose climate risks.
But with more sustainable sourcing, water conservation, and other sustainable finance initiatives, they can “deliver bottom-line benefits … [and] provide competitive advantage by better anticipating and adapting to environmental changes in the supply chain, such as water and resource scarcity and/or reputational risks and conflicts.“
Geospatial tools make it easy to contextualize and visualize business intelligence data, streamlining the data management process and allowing ag lenders and investors to stay competitive in an increasingly digital landscape. Plus, ag professionals can use these tools to meet ESG reporting requirements and sustainability benchmarks.
While the long-term impacts of climate change on the agricultural sector may be hard to predict, it’s clear that investing in better business risk intelligence tools now will give ag finance professionals a competitive advantage and set them up for future success.
The Bottom Line
Effective business risk intelligence in agriculture calls for advanced data collection and analysis that can put existing financial data sets into perspective. Physical risk factors such as water stress and water quality are just as important as a borrower’s traditional financial risk when it comes to assessing farmland values and approving or denying loans. By putting financial data into a geospatial context, lenders and investors can make better business decisions on a parcel-by-parcel basis.
AQUAOSO’s GIS Connect platform is specially designed for ag finance professionals, with automated workflows that can help with data collection and reporting. Users can integrate third-party climate data with proprietary bank data using a secure API, and create custom PDF reports to share with other stakeholders. GIS tools like these can save lenders time and money by improving their operational efficiency and bringing business risk intelligence into the 21st century.
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