The Crash No One Sees Coming: Food System Failure

Forbes

15-07-2025

PANZHIHUA, CHINA - MARCH 9: (CHINA OUT) A farmer walks on a dried-up field on March 9, 2010 in ... More Yanbian County of Panzhihua City, Sichuan Province, China. There was no rainfall in nearly half year in Panzhihua, resulting in no harvest of crops in many areas. According to the Ministry of Agriculture, severe drought had hit over 4.09 million hectares of farmland in southwestern China since early March, with more than 2 million hectares seriously damaged. The affected regions are in Yunnan Province, Guangxi Zhuang Autonomous Region, Guizhou Province, Sichuan Province and Chongqing Municipality, which contribute to about 16 percent of the country's annual grain output. (Photo by)
'We're losing 120 calories per person, per day, for every degree of global warming.' That stark data point from a 2025 Nature study signals more than a threat to food security, it points to a growing risk to global financial security.
Food system instability exposes markets to cascading shocks: inflation, trade disruption, insurance losses and sovereign credit stress. Yet these risks remain largely unaccounted for in core financial systems. Despite mounting exposure to climate-driven volatility, financial systems, from asset pricing models to fiscal and monetary policy frameworks, still treat food risk as peripheral.
This disconnect is no longer sustainable. As climate extremes intensify, the next financial crisis may not come from housing or tech, but from a climate-driven breakdown in the global food system.
The Climate-Finance Disconnect
Climate models show that under high-emissions scenarios, global staple crop yields could fall by 20% to 35% by century's end, even with adaptation. A recent study in Nature estimates wheat, maize, and soybean yields may decline by nearly a third if warming exceeds 2°C. Maize alone accounts for nearly 40% of global grain production. These aren't just commodities, they are pillars of food security, trade, and inflation control.
Reduced crop yields lead to supply shocks, fuelling inflation. That inflation prompts central banks to raise interest rates, tightening credit and increasing debt pressure, especially in food-importing nations. Some of these disruptions unfold suddenly, like the 2007–2008 food price crisis that triggered unrest in over 30 countries or the Ukraine war that sent wheat and fertilizer prices soaring. Others build more slowly, as years of slow decline can steadily erode farm margins, strain rural credit systems, and increase sovereign exposure to food volatility. Both pathways, acute shocks and chronic pressures, pose serious, under priced risks to financial stability.
Daniel Blaustein-Rejto, director of food & agriculture at the Breakthrough Institute explains that a common misunderstanding in both policy and financial circles is that research says climate change will cause yields to collapse outright. While that's not the case, climate change will significantly slow their growth. Compared to a world without warming, even modest yield drag could destabilize markets built on expectations of consistent gains.
Insurance markets, already struggling to price climate-related risk in agriculture, are sounding the alarm. According to a 2025 report by Howden and the European Investment Bank, only 20–30% of European farmers have insurance coverage for climate-related losses, leaving potentially billions in uninsured losses. The report warns that climate change 'could render parts of the food system fundamentally uninsurable.'
As private insurers retreat from high-risk areas, public institutions are forced to absorb growing losses, adding fiscal pressure to agriculture-dependent economies. Commodity market volatility grows as investors speculate on food scarcity, amplifying systemic risk.
As Dr. Howard Botts, chief scientist at geospatial risk intelligence firm Cotality says, 'The agricultural sector is deeply tied to both physical and financial risk, and climate-driven shocks in insurance availability will not stay contained.' Crop failures can lead to loan defaults among farmers and agribusinesses, threatening the stability of local banks. In regions where agriculture comprises a significant share of GDP, this creates a hidden but potent channel of financial contagion, one largely absent from most macroeconomic risk models.
Widely used tools like the Social Cost of Carbon (SCC) don't account for the cascading effects of food system degradation: soil depletion, water scarcity, nitrogen runoff, biodiversity collapse. Agriculture is not only a major source of methane and nitrous oxide, but its degradation strips away natural buffers that once absorbed shocks, stabilized local climates, and protected communities from cascading economic disruption.
Venture capitalist Ibrahim AlHusseini, founder of FullCycle puts it bluntly: 'Declines in staple crop yields will drive structural disruption across the food system. Insurance models aren't accurately pricing yield risk, and agri-finance exposure is heavily concentrated in vulnerable regions. A sudden repricing could ripple through commodities, food company valuations, and sovereign debt markets.'
Markets also fail to price in tail risks, like multi-year droughts or concurrent crop failures in key regions. Climate volatility is accelerating, with swings between drought and deluge (what climate scientist Daniel Swain has called hydroclimate whiplash) becoming more common. These events disrupt yields, strain supply chains, and destabilize inflation metrics.
Max Dugan-Knight, who leads research on extreme weather and climate change's impact at Canada's Deep Sky Research, warns that markets are still failing to price in long-term tail risks, even as the probability of extreme events like crop failure-inducing heatwaves has increased twentyfold. He adds: 'Both extreme heat waves and prolonged drought are major risks for the agricultural sector and neither have been properly reckoned with by financial markets. These risks operate on a long time horizon, and markets are still primarily responding to short-term price signals.'
Without models that reflect these interconnected risks, capital continues to flow toward systems that accelerate ecological breakdown. Some versions of the SCC place climate damages as low as $50 per ton, but models that factor in food system collapse push it toward $200–$400. Until these tools evolve, financial markets will remain blind to one of the most significant systemic threats of the century.
Food system risk is not just mispriced, it's misgoverned. It falls between the cracks of institutional responsibility, where no single actor sees or manages the full picture. Treasuries tend to treat food shocks as a humanitarian issue, while central banks ignore it in inflation forecasts. Many investors think of agriculture in ESG terms, rather than integrating it into mainstream risk models or financial decision-making. Meanwhile regulators often treat food supply chains as private logistics problems, not strategic infrastructure.
The 2025 G7 Finance Ministers' communiqué, for example, made no mention of food systems, insurance risk, or agriculture's exposure to climate volatility, despite clear evidence that food prices drive inflation, trade imbalances, and sovereign credit stress.
As Francisco Martin-Rayo, chief executive of climate risk platform Helios warns, 'The G7 keeps talking about climate in abstractions, but they're dodging the real problem: our global food system isn't adapting.' He adds, 'Delay means stranded irrigation infrastructure in failing regions, collapsing crop insurance pools, and escalating sovereign credit risk tied to food volatility. Even with adaptation, wheat and maize are projected to drop 30–40% by century's end. That's not a future risk, that's an underwriting crisis in motion.'
This isn't just a public policy failure; it's one of market design. Financial models still favor short-term yield over long-term resilience, and risk management tools lag behind today's climate reality.
The climate-driven insurance retreat is already underway, but asset repricing lags. This mirrors the U.S. housing market, where insurers pulled out of climate-vulnerable areas long before home prices reacted.
As Max Dugan-Knight of Canada's Deep Sky Research explains, 'In both real estate and agriculture, insurance becomes most important right when it also becomes most expensive. Only a very developed and robust insurance market can survive rapid changes in levels of risk. Failures in the insurance market do not stay within insurance. They soon impact broader financial markets.'
Food systems may be on a similar path, where insurers act early, but capital markets respond only once the consequences are too large to ignore. In 2025, The Grocer published a letter from 20 senior UK food executives warning that just-in-time supply chains, short-term contracts, and siloed oversight are leaving the sector unfit for climate shocks. Their call: treat food security as critical infrastructure and build systemic resilience before the next collapse.
A New Framework For Risk And Resilience
The global financial system remains structured around assumptions of abundance and stability, but the food system is now becoming an active vector of volatility. Dugan-Knight observes, 'Food price increases are already happening, but distinguishing climate impact from tariffs and general inflation is difficult. Financial actors may be tempted to write it all off as temporary, ignoring the growing underlying climate risk.'
To avoid another crash born of ignored risk, finance and policy leaders must treat food systems as financially material, not a background variable. That means revising credit and insurance models, investing in soil and water resilience, and funding diversified food systems that can withstand disruption.
The parallels to the 2008 housing crisis are hard to ignore. There, systemic fragility was masked by financial models that failed to capture real-world risk. Food may be next. Without decisive action, climate-driven shocks to the food system could ripple outward, triggering broader financial contagion. Ensuring stability will require building climate-resilient food systems, an imperative that financial markets can no longer afford to overlook.