Sustainable Agriculture Practices That Need Financial Capital
In late 2021, world leaders gathered in Glasgow for COP26, better known as the UN’s climate change conference. With over 25,000 attendees meeting to discuss the efforts needed to address climate change, themes of sustainability, renewable energy and the reduction of carbon emissions were prevalent.
The summit’s website references the instrumental part that capital plays in the process of moving the world towards sustainability by writing, “financial institutions must play their part and we need work towards unleashing the trillions in private and public sector finance required to secure global net zero.”
Following the event, the BBC reports an agreement between 100 countries in attendance centered around a 30% reduction of greenhouse gas emissions, come 2030. As it stands, agriculture has accounted for 10% of GHG emissions in 2019, but the effects of climate don’t just stop at a rising temperature.
Over the last forty years, extreme weather events culminated in 90 disasters that amounted to over 1 billion dollars in damages.
Trends like these continue to show a paramount need for the implementation of sustainable agriculture practices across the globe.
Protecting assets by increasing their resilience against environmental events lowers the probability of risk. But none of this can be done without the necessary financial support needed to carry out these initiatives.
Establishing the Benefits of Sustainable Agriculture Practices
When financial institutions communicate with the agricultural operations they fund, it can unlock major benefits that were previously closed off due to lack of capital and make the implementation of sustainable agriculture practices easier.
Because sustainability techniques are often holistic to operations, creating portfolio-wide resilience can come with many perks for both producers and their lenders.
While the term “sustainable” in agriculture has no universal definition, the essence behind sustainability in the sector focuses on the long-term. Techniques usually prioritize more efficient usage of nonrenewable resources and aim to protect the economic viability of farm operations.
Principles like these go on to generate a more diversified portfolio and a higher ROI. More benefits also include increasing the longevity of farms and higher crop yields, which producers can then charge higher premiums for while witnessing a stronger level of climate resilience throughout the operation.
Investing in sustainable agriculture practices allows ag lenders to increase confidence in their investments. In creating a pathway to a cleaner future of agriculture, financial institutions are directly aligned to build a stronger, more diverse portfolio.
There are also new ways of incentivizing cleaner agricultural practices that are also another bonus for ag lenders, one major form is through the use of carbon credits.
These credits are aimed to help in the reduction of greenhouse gas emissions, specifically the release of carbon dioxide into the atmosphere. They are obtained by an organization that has a verifiable reduction of emissions and can be valuable assets for financial institutions to sell off to other companies that want to use it as an offset for their own emissions.
In summation, sustainable agriculture practices build resilience into on-farm operations which trickle up into lender benefit. The following practices can provide lasting benefits and need financial capital in order to deliver.
5 Sustainable Agriculture Practices
Adopting sustainable agriculture practices can help maximize resilience within an ag bank’s portfolio. This is because techniques that prioritize sustainability result in high crop yields, climate resilience, and increase overall longevity. When a farm’s operations are well equipped to handle the threats that come with environmental shifts, both they and the institutions that back them can reap benefits like a reduced cost in overhead and a decreased rate of defaulted loans.
As ag lenders continue to research different ways to build resilience, an ongoing analysis being done on what forms of sustainable agriculture practices can be implemented across their portfolios can help lower risk.
Financial institutions with strong borrower-lender relationships can have the advantage of having conversations with their borrowers and propelling their mutual resilience against environmental changes and disasters.
1. Regenerative agriculture
Another keynote topic at COP26 was the implementation of regenerative agriculture, but as the EDF reports, most agricultural loans do not come from global commercial banks, they come from the Farm Credit system and other regional banks.
This holistic approach to agriculture is based on preserving the land and even nurturing it to produce higher quality crops. Regenerative ag looks at the farm as an ecosystem and can result in improved soil health.
2. No-till farming
Conventional agriculture often uses tilling as a way to loosen up compacted soil, however, this technique destroys soil structure and leads to soil erosion. By practicing no-till farming, the level of disruption that occurs allows for the sequestration of water and nutrients that can go on to produce better crops. Farmers can also see benefits in the form of lower financial capital being spent. With no-till, producers can save money on equipment like plows and the fuel needed to power them. The Scientific American shares, “it requires 50 to 80 percent less fuel and 30 to 50 percent less labor than tillage-based agriculture, significantly lowering production costs per acre.”
3. Cover cropping
Rather than cultivating one specific crop on the same piece of land repeatedly and thereby increasing the risk of soil erosion, cover cropping is used during a cash crop’s off-season to not just protect surface soil but strengthen it too. By enhancing existing biodiversity, maintaining soil structure, and warding off pests and weeds, farmers can return the next season with an improved soil quality that is rich with nutrients and water availability.
SARE conducts an annual survey on the effects of cover cropping with over 1,000 farmers and has found that:
“…farmers can expect a 3% increase in their corn yield and a 4.9% increase in soybeans after five consecutive years of cover crop use. In the drought year of 2012, farmers reported even greater yield increases when they used cover crops: 9.6% in corn and 11.6% in soybeans.”
The USDA suggests some additional benefits of cover cropping are “the application of a nitrogen fertilizer,” “suppressing soil diseases,” and “can provide high-quality for grazing livestock.”
Agroforestry is a sustainable agriculture practice that showcases a new level of the needed efficiency for the future of the world’s food production systems. Within the U.S there are six mainstreamed agroforestry methods: riparian buffers, urban food forests, alley cropping, forest farming, windbreakers, and silvopasture.
By introducing crops and livestock into spaces with trees, this method has the potential of establishing net positives in areas where it is practiced because it fosters diversity in ways that are contingent on maintaining the ecosystem around it as healthy as possible.
The World Resources Institute reports a $2.53 billion value, added directly from agroforestry initiatives per year over the course of 20 years.
By cultivating renewable energy side-by-side with crops, agrivoltatics aims to reduce water usage and improve food production, all while creating a clean energy source at the same time.
By using the science of light saturation points, farmers who use agrivoltatics can use solar panels to provide their crops with the perfect amount of sunlight they need and reduce their water consumption. Whatever sunlight that is not benefiting the plants gets absorbed by the panels and is then converted into energy.
The Bottom Line
Sustainable agriculture practices are pathways for not just farmers but financial institutions as well. They can create mutual resilience, increasing the longevity of operations and the profitability of business portfolios looking to maximize ROIs.
These practices need financial capital.
AQUAOSO’s GIS Connect is a climate fintech tool that is purpose-built to help ag lenders see plainly the linkages between climate risk and financial risk as well as report on them.
Request a demo to see how it works, or visit our blog post to learn more about sustainability in ag finance.
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