The Guide to Drought Risk Mitigation in Agricultural Finance

Only a few years after the 2012-2016 drought, some of the largest agricultural regions in the American West are once again experiencing abnormally dry conditions. As of May 18, 2021, the U.S. Drought Monitor reports that 52.88% of the western United States is in extreme or exceptional drought.

Precipitation levels low over the winter, causing declined snowpack. The water content of the Sierra Nevada snowpack, for example, was at only roughly 10% of its usual levels. This is the second year in a row in which rainfall has been occurring in the wrong places and at the wrong times, resulting in below-average snowpack, disproportional evapotranspiration, and contributing to drought.

In anticipation of worsening conditions, California allocations have been drastically cut –  a clear sign that farmers can expect limited water resources in the months ahead. Now is the time for ag lenders and investors to take proactive steps to mitigate water risk based on the specific risk profiles of the farms in their portfolios.

 

The Bottom Line

The health of the agricultural economy relies on a complex interplay between climate patterns, regulations, market pressures, and most importantly, how agriculture professionals respond.

The most efficient way to be truly proactive and prepared for drought risks and other adverse impacts of climate change is to begin with data-driven intelligence that aggregates relevant information in a single place and shapes it into stories that are in the context of the stakeholders utilizing it.

 

This guide will explore the financial impacts of drought on agriculture, the influence of climate change on drought patterns, and how ag professionals can learn from history to improve their water security practices year-round. To explore more, use the Table of Contents below.

 

Download the 2021 white paper on drought in California, or contact the team at AQUAOSO directly to learn more or request a demo of our products.

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Using California Drought GIS Data to Assess and Mitigate Portfolio Risk

The California drought that lasted from 2012 to 2016 led farmers to implement a variety of risk mitigation measures, from fallowing land to buying and selling water in regional water markets. The U.S.D.A reports that “farmers fallowed 37% more summer acres and 154% more year-round acres in 2015 than they did in 2011,” while water prices reached record highs — as much as $2,200 per acre-foot.

While some of the impacts of drought are unavoidable, farmers who don’t plan ahead are likely to have fewer options to respond than those that do. Factors such as physical water scarcity, pumping restrictions under SGMA, water prices, and more can impact how resilient a farming operation is during a drought.

Ag lenders and investors can play a role in the risk mitigation process by learning where each property in a portfolio gets its water and how secure it is in times of water stress.

 

Having accurate California drought GIS data is key to understanding the links between these sources of information because it allows ag professionals to make decisions based on a more holistic picture of water availability.

 

Read the full article on using California drought GIS data to mitigate portfolio risk.

Understanding Drought History Patterns for Ag Lender Resilience

The drought that farmers in the American West are facing isn’t the first and it won’t be the last. In fact, future droughts are expected to be longer and less predictable than those in the past. But by learning from drought history, ag professionals can take proactive steps to mitigate impacts and create a more resilient agricultural economy.

One of the biggest takeaways from the 2012-2016 drought is that few ecosystems were spared. Everything from forest trees to Chinook salmon populations suffered, which had ripple effects on the region’s water cycle.

 

Healthy ecosystems such as forests, wetlands, and headwaters are vital to a healthy agricultural economy, underlining the importance of ecosystem services and nature-based solutions to mitigate physical risks.

 

Overall, California lost $1.84 billion and 10,000 jobs in 2015 due to the 2012-2016 drought.

That isn’t the only historical drought that lenders can learn from, however. The Bureau of Reclamation released a report in 2021 that looks as far back as 1473 and as far ahead as 2099. Based on paleohydrological data, they found that future droughts are likely to last twice as long as in the past, lasting between 4 to 6 years.

At a more granular level, ag finance institutions can use GIS data to look at historical drought patterns for a specific region or parcel of land to predict what is likely to happen during a future drought. If certain water sources dried up or increased in price, lenders can work with borrowers to find additional water sources or water-conservative alternative practices.

Read the full article on understanding drought history patterns here.

Drought in the West – Trends, Agricultural Impacts, and Risk Mitigation

Climate change presents variability in the length and severity of drought. Many of the key indicators of drought are useful to lenders and investors. Rainfall, snowpack, and other climate data can all point to drought when put into context and applied to specific regions or parcels of land.

 

These indicators aren’t always uniform, though. Drought impacts agricultural areas of the American West variably. Each region has certain characteristics that cause drought to take different forms of risk.

 

Ag professionals should incorporate multiple data points when assessing water and drought risk in their portfolios and take their cues from how regulatory bodies and other agencies respond to drought indicators. If the State Water Resources Control Board predicts a reduction in water deliveries or if the Nasdaq California Water Index rises by 30%, then these are signals that it’s time to be proactive in preparing for dry conditions.

Ag lenders and investors should be proactive and ensure that their borrowers have the resources in place to withstand a drought of unpredictable length and severity. The best way to understand the subjective impacts of drought is to utilize data-driven intelligence that allows ag professionals to see risk in terms of their portfolio.

This article delves into the current drought conditions in western states and the impacts that this drought has on agriculture. It also explores risk mitigation strategies. Read the full article on drought in the American West here.

What A Megadrought Means for the Agriculture Economy

The term “megadrought” is a buzzword in many mainstream publications, but the data behind it matters more than what it’s called. There’s no widely accepted, official definition of a megadrought, although it’s typically understood to mean a drought that lasts for two decades or more. According to some reports, the West is already in one, with the current period being the “driest 19-year span since the late 1500s.”

Based on tree rings and other paleohydrological data, scientists predict “a more extreme trend toward megadrought as global warming continues,” and wet and dry periods may not alternate with the same regularity as they have in the past.

 

This means farmers will need to assess their portfolios’ abilities to exhibit long-term resilience. Ecosystem services that keep natural systems in balance and contribute to soil and water health will come into play.

 

Ag professionals can use data-driven intelligence to make informed predictions about what a megadrought would mean for the agricultural economy, such as prolonged stress on water resources and higher costs to maintain water-intensive crops. Some solutions may include investing in water infrastructure and other strategies that increase a farm’s long-term resilience.

Read the full article about megadroughts here.

Climate Change Impacts on Drought, Floods, and Agriculture

The effects of climate change on agriculture can vary from region to region. Some areas may experience land subsidence and saltwater intrusion, while others could be exposed to a greater range of weeds and pests. Climate change will also have an impact on the swing between wet and dry periods as well as the severity of droughts and floods.

One study found that regions as widespread as the United States, Australia, Spain, Portugal, and Brazil were all “particularly vulnerable to multi-year drought events, with the potential for drought magnitude to exceed historical experience.” At the same time, NASA predicts that many farming regions in the U.S. will be at risk of “heavy rain events that can overwhelm the local watershed’s capacity to absorb excessive water.”

This presents a unique challenge for ag professionals: at the same time as the industry needs to increase its capacity to store and transport water, it also needs to shore itself up against heavy rains, floods, and saltwater intrusion. Improved runoff collection and groundwater recharge methods can help to mitigate some of these physical risks, as well as nature-based solutions such as farming in floodplains.

Read more about climate change impacts on drought, floods, and agriculture here.

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