Severe weather and climate change events add an additional layer of risk for credit professionals, and these events are becoming increasingly more common. Everything from hurricanes to droughts, snow storms and wildfires, the weather is contributing to rising prices and payment delays. In order to prevent future losses, credit professionals must be proactive when disaster strikes.
According to the National Oceanic and Atmospheric Administration (NOAA), in 2022, there were 18 weather or climate disaster events with losses exceeding $1 billion each. And total economic losses from natural disasters in 2022 are estimated at $313 billion, according to a report from AON. "Though 2022 was far from record-breaking in terms of overall losses, it saw many impactful and costly events across the globe," the report reads.
Severe weather events have disrupted the construction industry, especially in California. "Flooding caused a state of emergency," said Sherry Raposo, corporate credit manager at VSS Emultech (West Sacramento, CA). "Our concrete company got super busy supplying sand, rock and concrete due to flooding. But at the same time, some smaller customers had to stop working and receivables slowed down."
Northern Texas has also been affected by an increase in rainfall in February and March of this year. A lot of projects have been pushed back and started impacting the customers' ability to pay, said Richard Fowler, CBF, credit manager at United States Lime & Minerals, Inc. (Dallas, TX). "Some of our customers are involved in construction commercial projects across town and when all these projects are halted, nobody is able to work and nothing gets done," he said.
As severe weather events become more common, insurance becomes more costly. Roughly 42% of direct aggregated economic losses were covered by public and private insurance entities, translating to a global protection gap of 58%. While a large part of the global disaster losses remains uninsured, this was one of the lowest protection gaps ever recorded, close to the record year of 2005 when roughly 40% of losses were covered, per AON. "One of the things we're seeing in Louisiana is that a lot of the insurers that would cover these natural disasters are pulling out of the state," said Mary Lou Schwartz, credit manager at Ferguson Enterprises LLC (Metairie, LA). "Some homeowners are opting out from renewing because they can't afford it due to storm damage from hurricanes."
Even companies who are used to the seasonal change in business say this winter has been worse than in the past. "We are in Utah and over the last several years our winter weather has been very mild," said Kandie Haymore, CCE, credit manager at Geneva Rock Products, Inc. (Murray, UT). "This year however has been very different. We started with our first major snow storm the beginning of November and it hasn't stopped. We supply concrete and aggregates for many contractors in the Wasatch Front and our construction division has many projects going also. Many of our customers, due to the boom of the past few years have counted on those mild winters to keep their funds flowing year-round. This year has been very different. Not only has the weather slowed down production but jobs have been delayed and that has impacted their cash flow and in turn, created a slowdown in payments to us. Although we have a broad customer base, we are seeing invoices creeping out further than in years past."
Climate change also impacts the pricing for agriculture producers, said Jason Mott, CCE, NACM Board director and corporate credit manager at MFA Incorporated (Columbia, MO). "A severe drought in 2012 affected the Midwest significantly, causing prices for crops to go up because there were not enough being produced. It also caused significant changes in regards to livestock because people had to euthanize their herds because there weren't enough to eat." He saw a higher level of past-due payments from producers that year and into 2013 while other companies had to use money intended to pay off debt to fund feed purchases for livestock.
The risk of severe weather conditions and climate change will never go away. But no matter the unpredictability, credit professionals must prepare for the worst in regards to their policies and payment terms. "Weather and climate change are going to continue to have a direct impact on agriculture and ability to pay," Mott said. "It's up to us as agricultural lenders to be cognizant of what's going on and try to be as proactive as we can."
-Jamilex Gotay, editorial associate