Environmental and Financial Risk in the Agribusiness Sector
Water scarcity is a persistent and growing issue for farms across Australia.
Access to affordable water is necessary for farms to remain competitive in an increasingly globalised food and commodity market.
Recent droughts have reduced dryland farming production, and the overall volume of water that can be allocated to irrigation. The full impacts of climate change, although uncertain, will also exacerbate future water scarcity.
Water scarcity therefore represents a material risk factor for farms across Australia with the potential for a reduction in yields and increasing the costs of farm production.
The aim of this project, conducted in partnership with The Yield and the National Australia Bank, is to clarify the materiality of water risk in the agribusiness sector in Australia.
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At present, the materiality of water risk is not fully incorporated into the assessment of farm loan applications.
This research assesses the current approach undertaken by the Agribusiness sector and farmers in Australia when assessing water risk, develops a new method to calculate the water risk exposure for a farm, and seeks to identify opportunities to improve the associated financial decision-making processes.
Building on the face-to-face interviews and literature review, a novel water risk assessment framework was developed from the ground-up.
The new on-farm water risk calculation methodology estimates the Water Value at Risk (wVaR) metric for a particular farm, allowing a banker to incorporate water risk exposure into existing financial decision making processes.
The project aims to understand water risk through a series of semi-structured interviews with agribusiness bankers and farmers, and then quantify and assess water risk through the collection of both primary and secondary data, collected through an online electronic survey and publicly available information.
To complete this research three different research methods were utilized:
- Literature review and data-analytic modelling – to analyse published data to understand water risk and construct risk assessment frameworks and procedures.
- Semi-structured interviews - to identify on-the-ground decision making processes of agribusiness bankers and farmers.
- Online electronic survey – to assess the materiality of water risk for Australian farmers, and to construct a database of water risk factors and distributions to better understand how water risk is presently managed.
In summary, this research aims to optimise the decision-making processes for both financial advisers and farmers.