The Impacts of Climate Change on Agriculture Water Risk
Water risk is one of the most important factors for ag professionals to monitor. Climate change is an overarching, macro risk factor with many arms. One of the most hard-hitting arms is water.
From extreme weather events like droughts and floods to unexpected changes in weather patterns, climate change will have long-term impacts on agricultural water risk. Because water risk translates so directly to business risk, any threat to the water supply can be a serious problem for ag finance institutions that have a stake in farms that are affected.
Water security is already an important consideration to be factored into any ag lending portfolio, but the impacts of climate change on agriculture will elevate its prominence.
This post will show exactly what the impacts of climate change on agricultural water risk are, and how ag professionals can use data-driven intelligence to better understand those risks.
What is Water Risk in Agriculture?
Water risk comes in many forms, ranging from regional water scarcity due to low rainfall, to reduced pumping allocations intended to address aquifer depletion. All of these risks can impact different parcels of farmland in different ways, but nearly all water risks are exacerbated by the impacts of climate change. These risks include:
In some ways, water stress is the simplest type of water risk to understand. It can be summed up by the following equation:
Water Demand > Usable Water Supply = Water Stress
If there’s less water available than what’s needed or requested by all users — including municipal and agricultural users — then that region is experiencing water stress. Water stress is often discussed at the watershed level, but it affects many parts of the U.S., and will only get worse due to climate change.
Agriculture relies heavily on water, accounting for up to 90 percent of consumptive water use in some parts of the country. Fortunately, water stress can be reduced with effective water management practices, water transfers, and conservation measures.
Wildfires are also expected to increase due to climate change. Farms that are located in areas at risk of drought may also be at risk of wildfire. Ag professionals should take the time to determine which parcels are most at risk, and monitor any impending wildfires that could threaten a farming operation over the short or long term.
Periods of drought occur when there is insufficient rainfall, or when snowpack melts at the wrong time or at the wrong speed — both likely to be worsened by climate change. Even when climate change doesn’t increase the severity of a drought, it may increase the average duration of droughts, requiring farmers to withstand longer periods of dry weather. In many parts of the western U.S., farmers are being warned to prepare for a megadrought.
Climate change can also lead to more unpredictable flooding patterns, with snowpack melting too early in the year to provide sufficient water for irrigation in the summer.
The Colorado River will be especially at risk of flooding, along with other “frequent, intense hydroclimate events” including heat waves, droughts, and low river flows.
The Los Alamos National Laboratory anticipates an average rise in temperature of 5.5 ºC in the region. Because of the river’s broad reach, changing weather patterns in the basin could impact up to 40 million people and $1.4 trillion in economic spending.
Climate Change’s Impacts on Water: Drought and Flood Risk
Every parcel in a portfolio has a different water risk profile, which is why it’s important to have comprehensive, portfolio-specific, data-driven insights. Water risk in agriculture is a business risk that results from water issues, and according to the latest models and scientific reports, climate change will disrupt the weather patterns that have led to the success of the agricultural industry over the past century.
Not only will climate change increase existing risks, but it will also create new risks and increase the likelihood that water risk will be found in a portfolio. The key is to identify, understand, monitor, and mitigate these risks.
How Climate Change is a Wild Card
Some variability in climate and weather patterns is to be expected. The EPA explains that:
“Average drought conditions across the nation have varied over time. The 1930s and 1950s saw the most widespread droughts, while the last 50 years have generally been wetter than average.” In normal years, farmers can take steps to mitigate, or at least withstand, the impacts of droughts, flooding, and variable weather.
But climate change represents a real wild card, with scientists predicting more erratic droughts and floods on the horizon:
“Because, with warming, more precipitation occurs as rain instead of snow and snow melts earlier, there is increased runoff and risk of flooding in early spring, but increased risk of drought in summer, especially over continental areas.”
In some cases, changing weather patterns can provide a net benefit when anticipated and planned for properly. For example, better runoff collection methods can be paired with groundwater recharge projects to create more sustainable watersheds. By being proactive and taking the initiative now, ag professionals can be better prepared to mitigate the impacts of climate change on agriculture.
The Agricultural Implications of Climate Change
The impacts of climate change on agriculture are many, but ultimately, being prepared for what’s to come has become a fiduciary duty — both for the planet and for the bottom lines of the lenders and investors who finance the agricultural economy.
Climate trends can have a real impact on the longevity and sustainability of a portfolio, as well as on the livelihood of borrowers and the well-being of farms and ranches.
Additionally, as ag professionals drive the transition to a more sustainable agricultural economy, being on top of climate change risks will give them a competitive edge.
Both consumers and investors want to know that companies are taking climate change into account, as evidenced by the rise in ESG investing initiatives.
Ag professionals need to be conscious of their public image, as well as a trend toward increased reporting requirements and financial disclosures. In Europe, climate-related risk disclosures are already a reality, with Swiss authority FINMA now requiring banks and insurers to disclose climate risks. Similar bills are being introduced in the U.S. at both the state and federal levels.
With all of these trends pointing in the same direction — toward data-driven reporting and decision-making — now is the time for ag lenders and investors to be proactive about climate risk. By working together, ag professionals can reduce the impact of climate change in agriculture and encourage a more water-resilient future.
The Bottom Line
Water risk can be a major concern for ag professionals in any given year, due to natural variability in weather patterns and climate trends. But climate change threatens to act as a wild card, introducing more uncertainty to weather patterns in many parts of the U.S.
Ag professionals can expect to see more severe droughts and floods, as well as less consistent transitions between wet and dry periods that have historically allowed for aquifers to recharge between dry spells.
Lenders and investors can mitigate these risks by using portfolio-specific, data-driven intelligence to inform their financial decisions. Portfolio-specific, geospatial technology such as GIS is an invaluable tool.
Reach out to the team at AQUAOSO to learn more about the platform, or subscribe to the newsletter to stay up to date on this topic and other water security issues.
2022 Sustainable Agriculture Trends for Ag Finance to Be Aware of
With real-world impacts like rising global temperatures, climate change is one of the biggest risk factors agriculture faces today. NOAA reported that 2020 was the second warmest year and the EPA explains a consistent increase of 0.16°F in average surface temperature...
Crucial Ways Agricultural Bank Services Can Contribute to A Sustainable Ag Economy
Ag banks and Farm Credits, enable agribusinesses to attain the financing they need in order to execute functions like harvesting and planting, as well as buying new equipment and combat overhead costs. They allow farmers to operate by engaging in a relationship with...
How Fintech Can Strengthen A Borrower-Lender Relationship in Agriculture
Fintech is a catalyst of financial success for the lender, the borrower, and the building and strengthening of relationships. It gives speed, accuracy, and agility. It helps get capital to where it needs to go, faster. Methods of decision-making have...