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Arla to transform dairy supply chain with incentives

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Arla Foods has introduced a sustainability incentive programme to its farmer owners to help fund and motivate actions required to hit the 2030 emission reduction target on farm.

  • Arla increases financial incentives for supply chain action.
  • Transformation of the agriculture industry will require value chain engagement.
  • It’ll be interesting to watch which industries, and companies, follow suit.

The Danish multinational cooperative Arla Foods is taking its commitment to cutting Scope 3 emissions very seriously, and has launched an incentive scheme to encourage its farm suppliers to act on climate targets.

Arla Foods’ scope 3 science based target is to reduce GHG emissions 30% per tonne of standardised raw milk and whey by 2030 from a 2015 base year. They have just announced that the company has earmarked up to three eurocent per kilo of milk for sustainability activities in addition to the existing one eurocent for submitting Climate Check data.

Based on the cooperative’s current milk volume, this corresponds to a total of up to €500 million annually.  Or, with the current milk price, it corresponds to approx. 7% of the milk price.

Arla’s Chairman Jan Toft Nørgaard said: ““The Sustainability Incentive model is a historical milestone in Arla’s transition to more sustain-able dairy. We are introducing an advanced and ambitious sustainability incentive, which is a fundamental change to our milk price model.”

Arla is increasing support for supply chain sustainability

Two years after implementing a comprehensive Climate Check on 8,000 farms across seven European countries, Arla farmers are taking another significant step to be at the forefront of environmentally sustainable dairy.

From 2023, the milk price that the individual Arla farmer will receive from the dairy cooperative will depend on his or her activities related to environmental sustainability.

The cooperative is introducing a point-based Sustainability Incentive model, building on data from the Climate Check, to reward current and future sustainability activities on farm.

Climate Checks is a programme that Arla implemented to help farmers identify the best areas to take steps to reduce their carbon footprint on their farms. When collated together, data from the dairy farms shares a picture of what’s really happening across Arla’s supply chain.

The Board of Directors is putting up to three eurocent per kilo of milk on the table annually to fund and motivate environmental improvements on 19 different levers.

The full incentive package includes the one eurocent that farmers will receive for submitting their Climate Check data, taking the full incentive to four eurocents. In the first full year, at least 270 million is expected to be distributed through the monthly milk price based on what the farmers are doing on 19 levers in the model.

Arla’s points based sustainability incentive system

The model is a point-based system, in which the farmers can collect points based on their activities on the model’s 19 different levers e.g. feed, protein and fertilizer efficiency, manure delivery to biogas, biodiversity, carbon farming and use of renewable electricity and deforestation free soy.

There are five core categories where farmers can score points. These are manure handling; use of sustainable feed; use of renewable electricity (on farm or purchased); biodiversity and carbon farming activities; knowledge building.

80 points will be available from the start in 2023 and further 20 points for new levers are expected to be built into the model within a few years, leading to a total of 100 points. For each point that the farmers are able to achieve, they will receive 0.03 eurocent per kilo of milk. Activities with bigger improvement potential for climate and nature will lead to the most points – and therefore also the biggest financial incentive.

In the first full year, at least 270 million is expected to be distributed through the monthly milk price based on what the farmers are doing on the 19 levers. The number is based on data from the 2021 Climate Check and corresponds to an estimated average of 39 points or 2.17 eurocent per kilo of milk for achieved points, including the one eurocent for submitting the Climate Check data, which is a pre-condition.

For an average Arla farmer with an average annual milk production of 1,2 million kg, it means that approximately 26,000 euro of the milk price is achieved based on his or her activities related to environmental sustainability.

It’s even possible that the average pay-out might increase even for the first year, as some farmers are expected to go for as many points as possible from the start, e.g. by shifting to renewable electricity during 2023.

It is voluntary if the farmer wants to go for the incentive or not. However, 95% of Arla’s farmers, representing 99% of Arla’s owner milk pool, have already registered their data in the 2022 Climate Check. Their points on some of the levers in the Sustainability Incentive model will therefore automatically be calculated and rewarded.

The dairy sector is facing a fundamental transformation

Given the growing concern about animal husbandry in environmental impact terms, it is clear that the dairy sector will need to change – either in preparation for or in response to further regulation.

Arla’s data shows its farmers already produce milk with around half the global average,  making them some of the most climate efficient farmers in the world.  That isn’t going to be enough.

Arla has recognised that if its going to achieve its science-based emission targets across the supply chain, its Scope 3 goals, its going to need to engage and encourage a fragmented network of suppliers. Incentivising them to supply data to enable measurement was a smart move. Adding an incentive to get them to change behaviours and processes seems even smarter.

Not only is Arla now setting a benchmark for performance in its own sector, it’ll be interesting to watch who follows suit. A question remains as to whether any rival without a co-operative framework will be able to implement such a change.

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