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  • Writer's pictureV K

Economic Impact of Climate Change on Agricultural Finance-Climate smart agriculture

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Agricultural operations face plenty of challenges. One of those challenges is “Climate Change”. Farmsio brings you the economic impact of Climate Change on Agricultural Finance through Climate smart agriculture. The changes that pertain to agro-ecological conditions like changes in temperature, precipitation, cloud burst, flooding, soil erosion, nutrient depletion, droughts to mention a few.

Unless the operations in the farms are scientifically altered, the results would lead to an uneconomical proposition of farming. Farmsio, provides acceptable and scientifically proven climate smart agriculture practices for better returns on investment. Such practices are called sustainable agriculture. It takes into consideration conserving the resources and facilitating future use.

The farm financed by financial institutions plays a major role in the farming operations. If the conventional farming system is followed the vagaries of climate may make the farmers indebted to the lender, who in turn bears the risk of financing the farm operations. The impact of not following climate smart agriculture is felt at the farm, by the farmers, bankers, food security systems and depletion of various natural resources.

Nowadays there is an increase in demand for food due to a growing population and changing diets, depletion in crop yield, and dwindling natural resources and biodiversity. The impacts of climate change bring additional threats to agriculture and the people closely associated with the industry.

Impact of Global Warming on Farming Sector:

Changing temperature patterns raise average atmospheric temperatures, more extreme heat throughout the year, fewer sufficiently cool days during the winter, and more frequent cold-season thaws will likely affect farmers in all regions across the globe.

Climate Change impacts;

• Floods • Droughts & Wildfires • Changes in Crop and Livestock Availability • New Pest, pathogens and weed problems

On the other side, it degrades the soil, Intensive requirement of farm inputs resulting in amplified crop production cost.

A warming climate could cut crop yields by more than 25 per cent, (Reference) while the extreme weather events associated with climate change can have devastating effects on farmers, their land and crops.

Financial Limitations for the Digital Agriculture Transformation:

Transforming the agriculture sector and building resilience will not be possible without significantly increasing the amount of capital available for climate-smart agriculture.

Whereas, access to finance has long been a challenge for the small farm holders, due to perceptions of low profitability and high risks.

The Impact of Climate Change on the Banking Sector:

Specifically, an increase in climate-related extreme events, including floods and storms, would put farm infrastructure at risk and hence affect banks and insurance companies. Climate change will have a growing influence on the stability of the banking system, potentially contributing to future financial crises.

The potential effect of climate risk drivers in Agriculture Finance:

Credit Risk: Climate change affects the crop yield, thus reduces the farmer’s ability to repay. This affects the Bankability to recover the lent crop loan from the defaulters.

Market Risk: Change in Climate does not just affect the yield, at times it also supports an increase in crop production abruptly thus the farmer either has to increase the commodity price during low production & shortage of products on the other side, market demand falls down due to excess availability of agricultural commodities. This affects the farmer’s ability to repay the crop loan.

Liquidity Risk: Banks’ access to stable sources of funding could reduce as market conditions change. Change in climate may cause banks to draw down the credit lines.

Reputation Risk: Increasing reputational risk to banks based on changing market or consumer sentiment.

These are the few examples that extreme weather can have on financial institutions, whereby extreme weather impacts the stability of banks and the financial sector as a whole. Therefore, it is important to focus on the effect of climate smart agriculture to understand how financial institutions are exposed to climate risks and what they can do in response.

Reduce GHC to Combat the Risk in Climate Changes:

Climate change policies are changing economics. Governments are starting to introduce policies to tackle the causes and combat the effects of greenhouse gas emissions (GHG), and these policies will alter the economics of entire industries. They will affect company share prices, both positively and negatively. Examples from the industry show that

Proactive strategies tackling CO2 emissions reap economic benefits. And climate change might not be the only reason for taking such steps.

Other benefits of climate change policy might include reducing dependence on energy imports, achieving more reliable energy price levels, ensuring clean air, and creating jobs. The growth of carbon markets associated with emissions entitlements offers revenue opportunities for developing countries.

Meeting Climate Change through Crop Insurance:

In general Crop Insurance aims to mitigate the hardship of the insured farmers against the likelihood of financial loss on account of anticipated crop loss resulting from incidence of adverse conditions of weather parameters like rainfall, temperature, frost, humidity, heat waves etc. Climate smart agriculture helps the farmers to acquaint crop insurance.

Though the insurance companies increase the premiums, Farmsio’s farm advisory services recommend farmers opt for farm insurance to avoid catastrophic losses due to adverse climatic conditions.

Check out the Advantage of Crop Insurance:

Importance of Crop Insurance – helping farmers to manage severe impacts to cope and recover from crop loss.

1. Gather information on future climate risks and thereby better predict and underwrite climate associated risks. 2. Control their exposure to natural catastrophes and other climate-related risks by developing adequate risk assessment tools such as flood zoning and establishing expertise for natural catastrophes. 3. Upgrade risk assessment methodologies such as identifying potential new liabilities from carbon emission or using environmental due diligence screening of a company. 4. Develop risk management expertise regarding low carbon technologies jointly with industrial clients to develop new products supportive of low carbon technology. 5. Research is needed to produce technological innovations that can accelerate the scaling up of Climate smart Agriculture (CSA). Research investments should target developing crop varieties, tree species, livestock and fish breeds, as well as entire sustainable and climate resilient farming, food, water, land and energy management practices and systems.

Financial Approach to Mitigate Climate Smart Agriculture:

Climate change disturbs the agricultural ecosystem, resulting in the change in agricultural climatic elements such as temperature, precipitation, and sunlight, while further influencing the arable, livestock, and hydrology sectors. Agricultural production is carried out through the selection of crops suitable for the climate of a specific region and the application of proper farming methods.

Climate smart agriculture can offer an opportunity for inclusive, economic growth, particularly in developing countries. With sufficient financing for sustainable and climate-smart production systems, the sector can unlock enormous economic potential while achieving several of the UN Sustainable Development Goals.

Addressing the Root of the problem through Farmsio FMS

Farmers associated with Farmsio doesn’t have to worry about the climate impacts. We undertake climate-based crop vulnerability analysis, with the use of satellite-based climate forecasts and agro-advisories to facilitate better financial decision-making by farmers.

Farmsio Reducing crop damage by making farms more resilient to climate changes

In addition, Farmsio’s Farm Management Software (FMS) facilitates Agriculture credit sources. Farmers can choose the source of agricultural finance from Institutional or Non-Institutional Sources. advises farmers with the Climate Smart agriculture and Sustainable Agriculture practices, that is by redesigning the usage of farmland based on the soil ecosystem, integrating trees, and livestock thus reducing the dependency on farm inputs like pesticide and fertilizers. Farmsio helps farmers to overcome the economic impact of climate change and increase better farm output.

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