Growing the role of lenders in the transition to sustainable agriculture
This post was written by Margaret Henry, Director of Sustainable Agriculture at PepsiCo and member of MRCC’s Steering Committee.
As PepsiCo’s Director of Sustainable Agriculture, my work is largely devoted to finding opportunities where the common interests of PepsiCo, farmers, policymakers, consumers, and others in the agricultural system intersect. Environmental and sustainability concerns—occasionally considered to be in conflict with business priorities—continue to become more deeply integrated into what we at PepsiCo consider “business as usual,” in large part because climate change poses a clear threat to our supply chain, agricultural system, and communities. However, we have cause for optimism: the adoption of sustainable practices, like cover crops, is showing promising results for improving water quality, holding more nutrients in the soil, increasing farm resilience to flooding and drought, and producing more nutrient-dense crops.
Despite the clear need for accelerated adoption of sustainable agricultural practices, there are very real challenges to any single actor’s ability to drive the needed progress. Some of the most significant barriers faced are caused by misaligned incentives, which predictably result in decisions that don’t consider long-term impacts on our food system. At PepsiCo, we emphasize the development of partnership-focused strategies that improve the system. In the agricultural sector, one of the most important relationships is between the farmer and their lender, I see this as a tremendously promising opportunity for positive change.
Farmers and lenders are both invested in ensuring a viable and productive food system. However, lenders aren’t likely to be connected to daily farm operations, which can impact the adoption of practices like cover crops. While farmers see firsthand the benefits of these practices, lenders don’t necessarily see soil health building over time, and as a result they may not understand the implications for farmers’ financial needs and longer term financial performance. It’s unreasonable to expect that farmers should assume the full task of educating their lenders about sustainable agriculture, but many find themselves trying to play that role. Thanks to the work of NGOs like the Environmental Defense Fund (EDF), which recently published a report on the topic, Financing Resilient Agriculture, we now have an opportunity to see the possibility for what a comprehensive and scalable sustainable agriculture transition could look like if the financial sector is able to engage more deeply.
Failure of an agricultural lender to integrate climate risk into their business model threatens their long-term viability, just as not considering the impacts of degraded soils and waters over the long term threatens our entire agricultural system. Maggie Monast, Director of Working Lands at EDF, and author of the report, charts a path for leaders in the financial sector to broaden the factors they consider when assessing risk. By including climate risks, lenders can create a more accurate picture that incentivizes long-term climate resilience for farmers, and better positions lenders for the future needs of farmers.
Traditionally, risk has been addressed for farmers through crop insurance. But, according to the U.S Department of Agriculture’s Economic Research Service, the costs to the Federal Crop Insurance Program and its premiums are expected to climb in coming years as a result of climate change. We hear from farmers considering sustainable practices but questioning the financial risks they might have to accept in trying something new. According to the USDA’s Sustainable Agriculture Research & Education program, we know that while practices like cover crops have up-front additional costs and some learning curve, they regularly show returns in 3-5 years.
For lenders, supporting the transition to sustainable practices could take a range of forms, but might include lower interest rates for operating loans or loan terms that are more responsive to the needs of the farmer during the transition to sustainable practices. However, there are opportunities for companies and other organizations to help, like cost share programs or by providing technical support to make the transition easier in the early years. At PepsiCo, we’ve worked in collaboration with Unilever to coordinate our cost share programs in Iowa. This program has found success with the support of Practical Farmers of Iowa, which provides technical and social support for new adopters. Following this success starting in 2017, we have expanded to 7 additional similar projects across the Midwest. We believe that this additional support adds significant value by helping farmers remain committed to cover crops after the cost-share program ends.
Managing risk is something we are very familiar with at PepsiCo—for example, adapting where we source ingredients in response to unexpected issues with quantity or quantity in a given harvest. But, there are real costs to supply chain disruption. PepsiCo’s encouragement of sustainable agriculture practices is driven by numerous motivations: certainly to meet our environmental goals, but also to make our supply chain more resilient, maintain profitability, and support the farmers and communities that we all rely on. This long-term view is one that PepsiCo takes seriously, and we look to support other companies and industries in working together for the adoption of agricultural practices that we know have a positive impact.
By supporting collaboration between lenders and farmers, we can unlock new opportunities, more quickly scale the financial benefits that sustainable agriculture offers, and make it easier and more profitable for farmers to begin their sustainable agriculture journey.