Download a PDF of the letter to Kevin J. Kramp, Director, Office of Regulatory Policy, Farm Credit Administration.
Dear Director Kramp,
The Institute for Agriculture and Trade Policy (IATP)1 appreciates this opportunity to comment on the above captioned ANPR. Our comment urges the Farm Credit Administration (FCA) to adapt its existing liquidity framework to include climate change related risks to agricultural finance, including the ability of the Farm Credit System (FCS) to sell its long-term debt securities in climate stressed capital markets. IATP believes widening the aperture of the FCA liquidity risk reserve rulemaking should not be delayed. As one USDA scientist told Politico for its investigation of 45 Agricultural Research Service climate change studies that USDA political appointees in the previous administration had refused to publicize, “You can only postpone reality for so long.”2 Likewise, the FCA should not postpone the reality of incorporating climate financial risk analysis in its bank liquidity reserve rulemaking.
IATP congratulates FCA for announcing, approximately coeval with the release of this ANPR, the formation of a task force to study “any potential risk that climate poses to the Farm Credit System through possible impacts on land values, crop productivity, animal health, and rural economies.”3 Our comment makes the case that the task force should also study the impact of climate change on capital markets and the FCS access to long-termed debt securities that finance FCS lending. IATP urges the FCA to issue a Request for Information for task force related research with at least a 90-day comment period, so that FCA and FCS can benefit from climate related financial risk management research in general, as well as that related to agriculture, including research from outside the United States.
Climate change is “politically charged,” as FCA Board Member Jeffrey Hall noted in announcing the task force. However, political tactics and ideology must not prevent the FCA and FCS from using the best available climate science and economics to help System banks and lending associations comply with the “safety and soundness” requirements of the Farm Credit Act. Climate change is now recognized by the intergovernmental Financial Stability Board (the Federal Reserve System, the Commodity Futures Trading Commission and the Securities and Exchange Commission are members) as a systemic financial risk to soundness and safety.4
The following comment answers the last of 34 questions in the ANPR: “What other approaches or methodologies to measuring and regulating liquidity not discussed above should FCA consider and why?” (Federal Register (FR), June 30, 2021, p. 34653) We address the ANPR’s “Other Relevant Issues” to consider in revising the FCA’s approach to measuring and regulating FCS liquidity. With public input gathered from the ANPR, FCA hopes to “Ensure that each FCS bank operates under a comprehensive liquidity framework, so it consistently maintains adequate liquidity to cover all of its potential obligations, including unfunded commitments and other material contingent liabilities, under stressful conditions.” (FR, p. 34645) IATP does not believe it is possible for the FCA to achieve this objective unless climate related financial risk is included as a factor in the FCA’s comprehensive liquidity framework. The adequacy of liquidity concerns not only a quantitative liquidity reserve and a line of credit that FCA can draw on during stressful conditions, but also the ability of debt securities that fund the FCS to compete for investors in capital markets under stressful conditions.
Although the word “climate” is not included among the examples of market stressors that have prompted this ANPR, it is certain that the financial impact of climate change on FCS banks will be of longer duration, and perhaps more severe, especially if the onset of irreversible climate tipping points is reached,5 than the COVID-19 shocks. IATP cannot provide FCA with quantitative answers to the critical questions in the ANPR about how to revise the Contingency Funding Plan. But we can provide some qualitative answers by drawing on the initiatives by other prudential regulators to measure and manage their climate related exposures. Further informing a bank liquidity reserve rulemaking are historical and econometric studies of the impact of climate change on U.S. agricultural productivity, prices and costs affecting FCS borrowers.
As the APNR notes, the Farm Credit System is “different from other lenders.” (FR, 34646) Because the FCS lends primarily for agricultural and rural development purposes, analyzing future FCS bank liquidity structure entails researching the likely future impact of climate change on agricultural productivity, including that of FCS borrowers. That impact is projected to be geographically variable and perhaps severely so by as early as 2030.6 The geographical scope of climate impacts, and consequently the economic impact on all FCS regions likely will be widespread. The recent history of climate impacts on U.S. agriculture suggest as much.
The Fourth National Climate Assessment in 2018 reported that the 2012 drought affected two-thirds of U.S. counties and resulted in $14.5 billion in production loss payments from the federal crop insurance program.7 Production loss and FCS borrower losses can be reduced by such practices as cover cropping, greater crop diversification and rotation, and rotational grazing. However, under current Business As Usual agricultural policy, the adaptation of U.S. agriculture to climate change is not widespread nor well-integrated. The Assessment states, “In the late 1990s, U.S. agriculture started to develop significant capacities for adaptation to climate change, driven largely by public-sector investment in agricultural research and extension” but warned that “these approaches have limits under severe climate change impacts.”8
For example, the Assessment gives a somber account of the Ogallala Aquifer Region (OAR) that produces about one-fifth of U.S. corn, wheat, and cotton and about one-third of its beef cattle, all dependent on irrigation:
Climate change is projected to further increase the duration and intensity of drought over much of the OAR in the next 50 years. Recent advances in precision irrigation technologies, improved understanding of the impacts of different dryland and irrigation management strategies on crop productivity, and the adoption of weather-based irrigation scheduling tools as well as drought-tolerant crop varieties have increased the ability to cope with projected heat stress and drought conditions under climate change. However, current extraction for irrigation far exceeds recharge in this aquifer, and climate change places additional pressure on this critical water resource.9
Data from reports such as this one, on the physical risks to U.S. agriculture of climate change, can be incorporated into FCA scenario analysis for estimating shorter and longer-term climate related financial risks in the FCS, including liquidity risk. Such analysis would enhance current FCS risk analysis capabilities.
FCA should use USDA research to estimate the extent to which taxpayer funded programs will mitigate losses of FCA borrowers whose agricultural production is affected by climate change. One study estimating the increase in crop insurance premia under three different climate scenarios states, “All climate scenarios considered suggest that climate change would lower domestic production of corn, soybeans, and wheat relative to a future scenario with climate identical to that of the past three decades. All else equal, this implies that prices would be higher than they would otherwise, which implies higher premiums and, consequently, higher subsidies.”10 Econometric scenarios necessarily require fixed “all else equal” factors to apply computable general equilibrium methodology.
To continue reading the letter and view the endnotes, please view a PDF of the letter.