How to Identify and Mitigate Ag Finance Risk Using a Data Management Platform
Ag finance has no shortage of risk. Any ecological, regulatory, or social factor that impacts harvests ultimately impacts portfolio returns. Anticipating and mitigating loss scenarios is key to remaining competitive in the volatile 21st-century marketplace.
Perhaps the greatest risk for ag lies in climate change. According to a 2021 Stanford study:
Climate-fueled temperature increases generated an estimated $27 billion in insurance payments to farmers between 1991 and 2017 … those losses accounted for nearly 20% of the program’s total payouts over that period.
As temperatures continue to rise and crops face even more severe stress, insurance can only do so much to protect growers and their financial backers. Lenders must equip themselves to navigate these escalating risks.
Fintech in the form of a specialized data management platform can empower ag finance institutions to identify points of acute and persistent risk and pave the road towards implementing effective mitigation measures.
This article will begin by defining what a data management platform is, then explore how the technology is set to turbo-charge ag risk management.
What is a Data Management Platform?
Data Management Platform (DMP) is a broad term that encompasses several types of tools. According to Microsoft, “Simply put, a DMP is a platform that helps you collect, organize, and activate data from various sources and put it into a usable form.”
Farm Credits, ag lenders, and banks with a DMP can do more with their data, helping to build better business operations. In the highly digitized marketplace of the 21st century, risk data is everywhere.
Depending on the needs of a business, web analytics, customer preferences, financial records, and geo-located markers all can be linked together to reveal insights that can drive strategy.
Beyond managing the data that a business already owns, DMPs are most powerful when they combine data from multiple sources. Starting with a company’s proprietary 1st party data (e.g. internal revenue figures broken down by account) a DMP can then integrate relevant 3rd party data (e.g. data on regulatory variation between municipalities) to produce all-new information (e.g. a breakdown of how regulatory risk interacts with revenue across municipalities).
Collecting and processing all this data in-house would drain valuable resources. By utilizing a specialized Data Management Platform with built-in access to pre-aggregated datasets, companies can build business intelligence more efficiently.
The more datasets it can combine, the more valuable a DMP becomes.
How Can it Help Identify Risk in Agriculture?
While many DMPs on the market tailor to general objectives such as optimizing the customer experience, a data management platform specifically designed to analyze climate and water risk can revolutionize the management of an ag finance portfolio.
As one of many examples, in the context of agricultural water risk, by integrating 1st party data on ag borrowers with 3rd party data on water rights, soil type, groundwater regulation, crop history, and drought level, a DMP can offer ag lenders a holistic risk profile reflecting the complex interactions of each relevant factor. Rather than conducting a parcel-by-parcel water audit, the right platform can provide instant access to a consolidated view of continually updating water indicators.
This is just an example in the context of water risk; there are many more risk datasets that can come into play in agricultural finance including climate, land use data, public records, borrower loan data, appraisal data, default probability, and more.
This seamless integration is made possible by leveraging geospatial formats. By utilizing datasets defined by precise location, all variables can be connected by a shared lowest common denominator. Geospatial data systems have the added benefit that they easily translate into high accessible data visuals and interactive maps.
Integrating environmental and regulatory data across an ag portfolio likewise improves the ease of ESG reporting. With relevant information already compiled and analyzed, fulfilling reporting standards that investors and governments demand becomes much simpler.
As explained by Forbes: “At the end of the day, investors are looking for less risk and more reward. Transparency leads to trust, which then leads to investment security. Smart data analytics platforms will deliver the transparency [investors] need.”
By leveraging a specialized data management platform, ag finance professionals can save time and money in the risk discovery process and in ESG reporting. While quite powerful in and of themselves, these capabilities are most significant when building resilience and long-term viability in a portfolio.
Where Does Data Management Platform Fintech Fit on the Road to Risk Mitigation?
To solve a complex problem, one must first develop a complex understanding of it. Data management fintech can unpack once-disparate datasets to help ag professionals make sense of precisely where, and exactly how, particular portfolio parcels experience risks in various forms.
As explained by AQUAOSO’s recent white paper on mitigation, which supply and demand-side solutions will be most cost-effective for one parcel can be very different for another. For especially thirsty crops, investments in more efficient irrigation tools can have sizable dividends. Conversely, areas with depleted or low moisture-bearing soil might be better candidates for regenerative agriculture methods.
These tailored approaches, however, are only unlocked when the numerous types of risks are broken down on the parcel level. A Data Management Platform utilizing granular geospatial data is the ideal tool to accomplish this goal.
For financial professionals unsure about this more novel use of DMPs, reframing a more common example can illustrate the value proposition.
As explained by Nielsen, by using a DMP to optimize customer experience “You can now continuously adjust your advertising and content across each channel to improve customer experience and marketing performance.”
Tweaking this sentence to use vocabulary relevant to ag finance, the result is: “You can now adjust mitigation planning and incentives across each parcel to improve portfolio resilience and financial returns.”
The Bottom Line
Data Management Platforms are versatile tools with the potential to revolutionize risk management for ag lenders and investors. By linking 1st and 3rd party datasets together, DMPs activate the full potential of company data and unlock insights to drive better business decisions. Given the many overlapping, dynamic risk factors at play in agriculture, a specialized DMP with aggregated geospatial data on climate and water indicators can be a valuable tool for risk mitigation.
AQUAOSO’s data acclimation platform is purpose-built to help ag finance professionals supercharge their risk and data management through fintech, laying the groundwork for successful mitigation.
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