Ag bankers and federal regulators should conduct stress tests to assess the financial risks of climate change, which poses a major threat to U.S. agriculture, says a new report released by a Commodity Futures Trading Commission commissioner.
“There is general agreement that climate change will reduce average yields and total production for most crops in most regions,” the report says, adding that “climate change is impacting, and is projected to impact, not only commercial agriculture in the United States, but also the ecological systems and biodiversity that agricultural systems rely on for everything from the provision of clean water to healthy forests."
The report notes it was not issued by the CFTC itself. "It was approved by the Subcommittee on Climate-Related Market Risk of the Market Risk Advisory Committee (MRAC)," whose sponsor is Commissioner Ross Behnam.
Commenting on the report, Behnam said that "extreme weather events continue to sweep the nation from the severe wildfires of the West to the devastating Midwest derecho and damaging Gulf Coast hurricanes. This trend — which is increasingly becoming our new normal — will likely continue to worsen in frequency and intensity as a result of a changing climate.”
The report says that traders dealing in farm commodities “must adapt to this wide range of physical risks by devising new ways to value, price, and manage climate risk."
But financial markets “will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions,” the report says.
The report urged the financial community to “not simply be reactive — it should provide solutions.
“Regulators should recognize that the financial system can itself be a catalyst for investments that accelerate economic resilience and the transition to a net-zero emissions economy. Financial innovations, in the form of new financial products, services, and technologies, can help the U.S. economy better manage climate risk and help channel more capital into technologies essential for the transition," the report says.
The report also says that agricultural adaptation measures such as micro-irrigation and resilience technologies, including drought-tolerant biotechnology, “offer great promise for mitigating potential future declines in agricultural output."
But a major challenge, as highlighted in a recent report from the Environmental Defense Fund, is how “financial markets and institutions can channel significantly more capital toward sustainable investments and net-zero-emission activities,” the report says.
One of the report's recommendations is that federal regulators need to take a close look at the financial implications of climate change. Research should focus on “the potential for and implications of climate-related ‘sub-systemic’ shocks to financial markets and institutions in particular sectors and regions of the United States, including, for example, agricultural and community banks and financial institutions serving low-to-moderate income or marginalized communities.”
Banks also need to conduct stress tests, the report says. “In this context, regulators should prescribe a consistent and common set of broad climate risk scenarios, guidelines, and assumptions and mandate assessment against these scenarios.”
Agricultural banks and those with large ag loan portfolios are specifically vulnerable to the risks of climate change, the report says.
“Small banks in the Midwest, in particular, hold proportionately more of certain types of agricultural loans that could be affected by climate impacts,” the report says. “Flooding and extreme heat reduce crop yields and disrupt agricultural production.”
As an example, the report cites last year’s spring flooding, when “bankers lending in the Midwest reported to the Federal Reserve Bank of Chicago that about 70 percent of their borrowers were at least moderately affected by extreme weather events in the first half of the year. At the same time, the portion of the region’s agricultural loan portfolios reported as having ‘major’ or ‘severe’ repayment problems hit its highest level in 20 years.”
Democrat Sen. Debbie Stabenow of Michigan, ranking member on the Senate Agriculture Committee, called the report "groundbreaking" and said it "comes at a critical juncture for our country and includes important recommendations that will help protect our economy from the climate impacts we’re already seeing."
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John Hartmann, global sustainability lead for Cargill’s agricultural supply chain and a member of the CFTC subcommittee, said in a note posted by the agency: “Agriculture is how we can mitigate greenhouse gas emissions, capture carbon and provide other ecosystem services for society as a whole,. In addition, a healthy and vibrant agricultural sector is necessary for a safe, sustainable and affordable food system.”
In December, Cargill adopted a target of reducing greenhouse gas emissions in its global supply chains by 30% per ton of product by 2030.
Other members of the 34-member Climate-Related Market Risk Subcommittee include Robert Coviello, senior vice president for sustainability and government affairs at Bunge; Jeffrey S. Dukes, director of the Purdue Climate Change Research Center; Athena Eastwood, outside counsel for Dairy Farmers of America; Dave Jones, The Nature Conservancy's senior director of environmental risk; Nathaniel Keohane, senior vice president for climate at the Environmental Defense Fund; Sara Menker, founder and CEO at Gro Intelligence; and Julie Winkler, chief commercial officer for CME Group.
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This article was corrected to note that the report was not issued by the CFTC, but by a subcommittee of the CFTC's Market Risk Advisory Committee.
