There are significant long-term benefits associated with improving

environmental performance that go beyond price premium.’’Blake Holgate, Rural Manager, Sustainable Farm Systems, Rabobank New Zealand

Sustainable Returns

Finding the Value in

Environmental Sustainability

Rabobank Agribusiness Report Special Edition

KEY MESSAGES

Globally, environmental sustainability is having a growing influence on the

behaviours of major food and agricultural (F&A) stakeholders:

LOCAL COMMUNITIES

REGULATORS

CONSUMERS

GLOBAL F&A COMPANIES (PROCESSORS/TRADERS)

FOOD RETAILERS/FOOD SERVICES

These dynamics will create opportunities for realising two types of value from

improved environmental farming practices – Price Premium & Long-term

Strategic Value.

For farmers, F&A companies, and different agricultural sectors, the type

of value they can derive from sustainability will vary depending upon the

product they are producing, how they are producing it, where they sit on the

supply chain, and who the end consumer is.

While some food producers may be able to use sustainability as a basis

to realise a price premium, for the majority of New Zealand’s agricultural

industry, the greatest opportunity to realise value in sustainability may lie in

the long term strategic value associated with being a globally trusted source

of sustainably produced agricultural products.

REGULATORS – progressively introducing higher environmental regulatory standards, particularly in developed countries, raising overall production costs.

LOCAL COMMUNITIES – no longer simply accept farmers have a license to operate as best they see fit, consequently, industry controls are increasingly giving way to government regulations.

CONTENTS

KEY MESSAGESpage 2

INTRODUCTIONpage 4

THE GLOBAL SUSTAINABILITY AGENDApage 5

WHERE IS THE 'VALUE' IN SUSTAINABLY PRODUCED FOOD?page 13

FIVE STEPS TO SUSTAINABLE SUCCESS page 19

2

PRICE PREMIUM

The challenge in realising a price premium is that sustainability is generally seen by many high

value target consumers as a precondition for purchasing food, rather than a genuine value-add

attribute.

To realise a price premium, sustainability should be linked to other attributes valued by

consumers to create a ‘story’ that connects with consumers.

To generate margin improvement the premium that is realised must exceed the cost of

achieving that premium.

LONG-TERM STRATEGIC VALUE

There are significant long-term benefits associated with improving environmental

performance that go beyond price premiums.

Positioning New Zealand as a reliable source of sustainably produced agricultural products

will, at a minimum, provide protection against potential future reputational damage. Done

well, it will create an opportunity to use sustainability as a competitive advantage through

getting closer to consumers, and building stronger relationships with major F&A companies.

Adhering to high levels of environmental performance is also important for ensuring

agriculture remains a legitimate industry in the eyes of the

New Zealand public. Preserving agriculture’s 'social license to

operate' is vital for maintaining the industry’s ability

to control the future direction of agriculture in New Zealand.

CONSUMERS –embracing more sustainable purchasing decisions, sustainable production now viewed as basic cost of entry in many markets.

GLOBAL F&A COMPANIES (PROCESSORS/TRADERS) – re-evaluating approach to sourcing of raw materials, having a guaranteed consistent supply of high quality sustainably produced materials now a strategic imperative for many F&A companies.

FOOD RETAILERS/FOOD SERVICES – moving away from ‘niche green consumerism’ and incorporating sustainability into their core business.

3

4

INTRODUCTION

The relationship between New Zealand farmers and the New Zealand public has

traditionally been characterised by a mutual respect and appreciation. The local public

have understood the significant social benefits that agriculture contributes to the

economy, communities, and national identity.

On the other hand, farmers have known that they have a responsibility to all New

Zealanders to manage the natural resources under their guardianship in a way that is

acceptable to the public.

Until recently, there has generally been a consensus between farmers and the public

in terms of what is considered ‘acceptable’. This acceptance of farming practices by the

public is what has enabled New Zealand farmers to operate relatively autonomously

from regulators over the past 100 plus years. The role of the regulators has largely been

limited to regulating the behaviour of those farmers whom fail to meet these commonly

accepted standards.

This report explores how New Zealand farmers can realise value beyond the farm gate from their investments in improving

their environmental performance.

The challenge in realising this value lies in the fact that, at this stage, rising environmental

standards are largely being imposed on farmers by the New Zealand public and regulators,

rather than being incentivised by end consumers that are willing to pay more for

sustainably produced New Zealand agricultural products. It must also be remembered that

the vast majority of consumers of New Zealand produce are located overseas, and don’t

directly benefit from farmers in New Zealand adhering to higher environmental standards

(with the exception of reductions to global greenhouse gas emissions).

Agriculture's

environmental footprint

50 %of the world's

habitable landscape

■

70 %

of all freshwater usage

■

30 %

of greenhouse gas emissions

Source: Rabobank "Winning through the supply chain - From chasing price

to adding value in the F&A sector"

in NUMBERS

5

THE GLOBAL SUSTAINABILITY AGENDA

The production and availability of food is such an essential part of life, and its impact on

natural resources so significant, that wider world influences like politics, trade and social

agendas have always had a connection to the F&A sector. While these forces have always

been present, there is a rising concern in many countries of the impact of the F&A industry

on the environment, people and animals. We are now in an era where these external forces

and agendas are having a fundamental impact on how food is produced and consumed

around the globe.

The sustainability agenda refers to the challenge of meeting the world’s growing demand for food, whilst reducing

agriculture’s ecological footprint, and sustainably managing earth’s scarce natural resources (in particular land and water).

There is a growing realisation that these resources must be managed interdependently.

Many consumers are responding by changing their consumption habits in an attempt to

reduce their individual environmental footprint. Society is now encouraging the F&A sector

to look at how its production practices can be evolved to improve its resource use efficiency.

The sustainability agenda is influencing the decision making and strategies of regulators,

global F&A companies, consumers, retailers and local communities. It is important that

the New Zealand F&A sector understands what these strategies are, identify how they will

impact the industry and how they might respond.

Rising global demand for

resources

60 %for food by 2050

Source: Rabobank

■

30 %

for water by 2030

Source: International Water Institute

■

30 %

for energy by 2030

Source: International Energy Agency

in NUMBERS

6

REGULATORS THE RISE OF ENVIRONMENTAL CONTROL

Agriculture can have significant impact on its surrounding environment. Agricultural practices can generate a variety of

substances that enter the atmosphere creating air quality issues and contributing to greenhouse gas emissions. Farming

practices can also lead to the derogation of water quality through the release of nutrients, sediments, pathogens and pesticides

into waterbodies.

It is the regulators responsibility to implement a framework that manages these

risks, and ensures the environment is preserved at a level deemed healthy and

acceptable to the public. Regulators also have a responsibility to ensure the

economic prosperity of their citizens.

As agriculture provides employment for 40% of the world’s population, and is

a significant source of income for many countries, regulators have sometimes

been cautious of environmental regulations that may stifle growth and

productivity in agricultural industries. However, pressure over the last decade

from global NGO’s, local environmental groups, and ultimately the public, has

forced regulators in most developed countries to introduce measures designed

to increasingly control farming’s impact on the environment.

Historically, to encourage the uptake of environmentally sustainable farming practices, many regulators have focused more on

the ‘carrot’ approach, rather than the ‘stick’ of regulation. However, in developed countries, we are increasingly seeing a shift

towards the use of regulations to change farmer behaviour in relation to the environment. As an example see Box 1 to learn

how farmers within the European Union are being required to adhere to higher environmental regulatory standards.

With increased regulation comes greater compliance costs, increasing the cost of production within the global F&A supply

chain. The exact increase in production costs will vary between regions, depending upon the particular policy approach taken

to changing on-farm behaviours. Farmers operating under a predominantly regulatory regime, like New Zealand farmers, are

ultimately likely to face higher increases in production

costs (in relation to environmental practices), than farmers

that operate under a mixed approach (incentives and

regulation).

For these farmers, the ability to find value in

sustainable farming practices is an opportunity to

counteract any competitive disadvantage resulting

from higher compliance costs.

The evolution of environmental regulation

Encouraging/ incentivising – the

behaviour they want to occur more

(e.g. providing subsidies, funding

education programs).

Discouraging/punishing – the

behaviours they don’t want occurring

(e.g. taxation, regulation).

7

Box 1

European Union

The Common Agricultural Policy (CAP) is the agricultural

policy of the European Union. It implements a system

of agricultural subsidies and other programs for farmers

within the Member States. Traditionally, the CAP was

criticised for using subsidies to incentivise large scale

expansion of agricultural production with little, or no

regard for any environmental consequences. In response,

the CAP was re-focused in 2004 to put the environment at

the centre of farming policy.

Integration of environmental requirements into the CAP

was achieved via two mechanisms:

1. Linking compliance with selected environmental

requirements to CAP payments and sanctioning non-

compliance by payment reductions ('Polluter-Pays-

Principle') and:

2. Providing financial incentives for environmentally

beneficial public goods and services ('Provider-Gets-

Principle')

Polluter-Pays-Principle

Since 2005, farmers have been required to observe

common rules and standards for preserving the

environment and the landscape. There are two elements to

this compliance:

1. Statutory Management Requirements – Refers to 18

legislative standards in the field of the environment, food

safety, animal and plant health and animal welfare.

2. Good agricultural and environmental condition

– Refers to a range of standards related to soil

protection, maintenance of soil organic matter and

structure, avoiding the deterioration of habitats, and

water management.

These rules and standards are seen as the 'baseline' or

'reference level' for sustainable farming practices, for which

the compliance costs must be met by farmers.

Provider-Gets-Principle

The CAP remunerates farmers whom voluntarily employ

their own resources and factors of production to deliver

environmental public goods and services on their farmland

that go beyond mandatory requirements.

Farmers have to commit themselves to adopting

agricultural activities, or levels of production intensity, that

deliver positive environmental outcomes for a minimum

period of at least five years. In return, farmers receive

payments that provide compensation for additional costs

and income foregone as a result of implementing actions

under their agri-environmental contract.

Examples of measures covered by the agri-environmental

contracts include:

environmentally favourable extensification of farming;

preservation of landscape and historical features such as

hedgerows, ditches and woods;

conservation of high-value habitats and their

associated biodiversity1.

While these payments could effectively be viewed as another

form of subsidy, the reality is EU farmers can now only unlock

these payments if they are implementing environmental

practices that result in an environmental public good

or service.

1. http://ec.europa.eu/agriculture/envir/measures/index_en.htm

8

Globally, F&A consumers are increasingly becoming more environmentally

and socially conscious. Many want to know that the food they are purchasing

has been produced in a sustainable way, by companies that behave in a

responsible and transparent manner.

Before purchasing, these consumers are doing their research, checking the

labelling, reviewing business/production practices on websites and seeking

public opinion on particular brands or products.

As consumers embrace more sustainable purchasing behaviours, the overall

market share for sustainable goods continues to expand. The number of

consumers that say they are willing to pay more for sustainable brands has

increased significantly.

While the overall trends are clear, market research shows there are important

regional and demographic variations that need to be understood if the F&A

sector is to fully capitalise on the increasing demand for sustainable products.

The youth continue to place greater value on sustainable production than

older generations. (See info-graphic on next page)

This creates both risk and opportunities for suppliers to these younger

generations. If suppliers are able to meet the high expectations that youth

generations have for sustainable products, they are likely to develop loyal

customers for life. However, suppliers that lose this demographic now, either

by not attempting to meet their expectations, or breaking their trust by failing

to deliver on their sustainability rhetoric, will find it very difficult to ever get

them back.

There is also a distinct difference between developed and developing

markets, with consumers in Latin America, Asia, Middle East, and Africa

indicating they are 23-29% more willing to pay for sustainability attributes

than consumers in Europe and North America2. Many consumers in these

developing markets realise that non-sustainable production practices have

significant negative impacts on their local communities, and see a direct

and tangible benefit of paying more for sustainably produced products that

reduce local pollution and resource depletion.

Sustainable Non-sustainable Brand Brand

4% 1%

The value of sustainable brand

of all global sales are from companies

marketing sustainability

in NUMBERS

65 %

Measured globally, 2014

Source: Nielsen’s 2015 Global Corporate Sustainability Report.

Based on online survey of 30,000 consumers in 60 countries, and actual retail sales data survey and

buying behaviours.

20132014

2016

50% 55% 66%

Consumers willing to pay more

Sales growth in 2015

CONSUMERS SUSTAINABILITY INFLUENCING PURCHASING DECISIONS

2. Nielsen’s 2015 Global Corporate Sustainability Report

9

2014 2016

50% 75%

For consumers in developed markets, sustainable production is

increasingly viewed as a basic cost of entry rather than a ‘value-add’

attribute. Often these consumers have a large range of choices when

making their purchasing decisions, and expect that they will be able

to purchase food products that have been produced sustainably. They

are less likely to purchase food products that are unable to clearly

articulate their sustainability credentials. To attract a premium from

these consumers F&A producers must do more than simply comply with

government environmental regulations, and must be able to tell a story

that links the product to an environmental and/or social value that goes

beyond compliance.

It is fair to question whether survey results showing consumers are

willing to pay more for sustainable brands, actually translates into

consumers paying more. It is also unclear from results like these the

extent to which consumers consider they are already paying a premium

for products originating from countries like New Zealand that generally

have a good reputation for being ‘clean and green’ producers of food.

However, what is clear, is that market intelligence is indicating global

consumer trends are changing, and that sustainability is having an

increasingly strong influence on purchasing decisions.

Suppliers that ignore this market intelligence, and are unwilling to supply

consumers with the sustainability attributes they are demanding, risk

losing significant market share to those producers that are.

Source: Nielsen’s 2015 Global Corporate Sustainability Report

Millennials19-35 years

Generation ZUnder 20 years old

Baby boomers 52-70 years

2014 2016

55% 72%

2016

51 %

The generation gap

- consumers willing

to spend more

on sustainable

products

in NUMBERS

10

GLOBAL F&A COMPANIES - PROCESSORS/TRADERS SOURCING SUSTAINABLY

The strongest indicator that consumer preferences are shifting is the changing behaviour of the major global F&A companies.

Global F&A companies recognise that consumers are no longer only interested in price, taste and nutritional content, but also

want to know where their food came from, and how it was produced. For these companies, consumer trust is now strongly

linked to both the sourcing activities, and the natural quality of the agricultural materials used in their products. With special

interest groups like Greenpeace and PETA closely scrutinising, and reporting on, the actions of global F&A companies, failure to

deliver on either of these attributes could cause severe reputational damage to a F&A company’s brand.

Consumers are increasingly holding F&A companies accountable for the activities of suppliers upstream in their supply chain,

including farming practices and farming inputs (e.g. fertiliser use, type of stock feed). This creates major traceability issues for

those F&A companies wanting to ensure the raw materials they are sourcing are sustainably and ethically produced (as well as

being of high quality, safe and of consistent supply).

Traditionally, F&A companies have sourced their commodities via long and anonymous supply chains. Knowledge of upstream

activities was often minimal, and the ability to control these activities even more limited. In order to create greater transparency,

many F&A companies have revised their strategic approach to sourcing raw materials, developing closer public, private and NGO

partnerships to create more integrated supply chains. See Box 2 to learn how the world’s largest F&A company, Nestlé, has made

this strategic adjustment3.

In addition to its own sustainability initiatives, Nestlé joined other global F&A companies, Unilever and Danone to create the

Sustainable Agriculture Initiative (SAI) Platform in 2002. Partners in the SAI Platform work in pre-competitive and collaborative

forums to develop tools and guidance to support global and local sustainable sourcing and agricultural practices.

The SAI Platform currently has over 80 members including most of the world's largest F&A companies (e.g. Coca Cola, Danone,

Kellogg’s, Marks & Spencer, Mars, Nestlé, Unilever and Fonterra).

Defining what good practice looks like, implementing good practice standards, and auditing compliance with those standards,

represents a major cost for F&A companies in terms of time and resource. While some of these costs can be mitigated through

pre-competitive agreements like the SAI Platform, and/or the use of NGO’s like World Wildlife Foundation as auditors, many

large F&A companies will be looking to form long term partnerships with suppliers that they can trust to deliver a guaranteed,

consistent supply of high quality, safe, and sustainably and ethically produced raw material. This creates opportunities for those

suppliers who are able to demonstrate their ability to consistently deliver these attributes.

"Today, we're talking about our food - as in what's in it, where it comes from and what impact it has on the environment, rather than sales volume"

Campbell's Soup CEO, Denise Morrision quote to New York Times in November 2015

3. In the year ending December 2015 Nestlé’s global food sales totalled $72,245,000,000, the most of any F&A company in the world. Source: Global Food Markets (GFM), Leatherhead Food Research.

11

“As we look ahead to the next ten years, it seems wrong to talk about “the future of sustainable agriculture” simply put, there is no future without sustainable agriculture5.”

Peter Brabeck-Letmathe, Chairman, Nestlé

4. Seminar – Creating Shared Value – March 4, 2010 – P. Brabeck-Letmathe.

5. Jose Lopez, “Remarks at the Rio+20 Corporate Sustainability Forum” (presented at the Rio+20 Conference, Rio de Janeiro, June 12, 2012)

6. Harvard Business School Case Study – Nestlé: Agricultural Material Sourcing Within the Concept of Creating Shared Value (CSV), August 9, 2013

Box 2

Nestlé – Creating shared value

Based around the concept of “Creating Shared Value” (CSV), Nestlé has progressively introduced initiatives designed to make its

whole food value chain more sustainable.

Nestlé’s CSV philosophy recognises that the company’s health and growth depend on having investment from its shareholders

and a social license to operate; thus, it has to create both financial and social value4.

Nestlé sources its agricultural products in two ways, firstly, by partnering directly with farmers, secondly, by procuring it

through large supply companies. Nestlé has initiated programs to promote sustainable sourcing from both of these channels.

Farmer Supply

Sustainable Agriculture Initiative (SAIN) Farmer Connect program – in 2000 introduced the SAIN Farmer Connect program.

SAIN provides traceability through to farmers' level by buying either directly from farmers, cooperatives or selective traders.

Nestlé provides technical assistance through a team of extension workers to encourage best agricultural and sourcing practices

amongst these suppliers.

Procurement

Implementation of measures to ensure sustainable sourcing from major suppliers was done in three steps:

1. Nestlé Supplier Code of Conduct – In 2009 established minimum standards that Nestlé suppliers were required to meet.

2. Responsible Sourcing Audit – In 2010 strengthened Supplier Code of Conduct by establishing an auditing program.

3. Traceability Program – In June 2010 Nestlé identified 12 categories, including milk, cocoa and coffee, it could strongly

influence through traceability and launched into traceability exercises6.

12

FOOD RETAILERS/FOOD SERVICES THE POWER TO INFLUENCE

Retailers and the food service industry, are also having a major influence on the

prominence of sustainability in the food chain. Retailers play a crucial role in

linking farmers and processors to the end-consumer, and are in the position to

put pressure across the food supply chain to drive the sustainability practices of

their upstream suppliers.

Large retailers are moving away from the old approach of ‘niche green

consumerism’ and increasingly integrating sustainability into their core

business. For some retailers this is largely a result of pressures by special interest

groups forcing them to adjust their sustainability policies. However,

many other retailers have realised the direct benefits (e.g. cost

reductions) or indirect benefits (e.g. better positioning

in the market for 'green' consumers) of placing

sustainability at the heart of their operations7.

The extent to which sustainability influences

how these retailers operate varies depending

upon how confident they are in their ability

to influence consumers and suppliers.

In this respect, it is possible to identify

two classes of ‘sustainability’ retailers,

contributors and leaders.

There is also a strong trend towards sustainability in the food service space, as chefs and

restaurateurs recognise more customers are incorporating sustainability practices into their

daily lives and want to extend that into their dining experience as well.

“We’ve been seeing strong trends towards sustainability in the food space for several years now and that’s going to continue to grow9”

Annika Stensson, The National Restaurant Association’s Senior Manager of Communications

Each year the National Restaurant Association (NRA) surveys approximately 1,600 professional American chefs to determine

the industry’s hottest trends. Over recent years sustainability related attributes have featured prominently in the top 10 trends.

In 2016 locally sourced meats and seafood came in first, environmental sustainability came in sixth, and sustainable seafood

ninth. The survey also found 42 percent of respondents thought environmental sustainability would be the hottest menu

trend in 10 years from now10.

Two classes of ‘SUSTAINABILITY’ retailers

Contributors – concentrate on

managing down their direct

environmental footprint and on

working with own-label products to

reduce impacts.

They provide consumers with as

much choice as possible, providing

information on sustainability issues,

rather than rationalising their

product lines.

Leaders – are more likely to impose

strict sustainability criteria on their

supply chains and consider indirect

as well as the direct, impacts of

their services.

They also act more proactively towards

their consumers, supplying more

sustainable products8.

7. “Sustainability practices and indicators in food retail logistics: Findings from an exploratory study” Dr Aristides Matopoulos and Prof. Michael Bourlakis

8. "Sustainability Trends in European retail" Forum for the Future www.forumforthefuture.org/project/sustainability-trends-european

9. http//www.restaurant.org/News-Research/News/Sustainability-tops-trends-on-2015-What's-Hot-survey

10. "What's Hot 2016 Culinary Forecast" National Restaurant Association

13

WHERE IS THE ‘VALUE’ IN SUSTAINABLY PRODUCED FOOD?

When discussing the value of sustainability derived beyond the farm-gate, it

is important to realise that value can be defined in many ways. Value can refer to

both the immediate monetary benefit of doing something (i.e. a price premium), or it

can be used to refer to the long term strategic advantage of taking actions that provides

growth and prosperity into the future (or at some point in the future). The opportunities for

realising both forms of value are discussed below.

Price Premium

Many consumers now consider having access to food products with adequate sustainability credentials as a

precondition for purchasing, rather than a genuine value add attribute. In other words, consumers in high value international

markets are unlikely to pay a premium for New Zealand products just because farmers are preparing Overseer Nutrient Budgets,

fencing off waterways and undertaking other actions required by their regional councils. If food producers want to attract a

price premium for their products they need go beyond simply complying with government environmental regulations.

To realise a price premium food producers need to be able to build sustainability into a larger story about their product/s, where it came from,

how it was produced, and what it stands for.

These stories must connect with consumers on an emotive level in such a way that they are willing to pay more for the

experience of consuming that product.

Organic and fair trade are good examples of production systems that have been able to capture a premium based around

the experience they provide for consumers seeking the specific sustainability attributes they deliver. However, to realise these

premiums, producers must meet a specific set of standards that are significantly more onerous than conventional industry

standards or government regulations.

New Zealand already has a number of companies that have been very successful at creating their own value add stories. In the

wool industry, Icebreaker and New Zealand Merino have been able to add value to a commodity by linking growers through

to end consumers. The wine industry has numerous examples of individual wineries (and entire regions, e.g. Marlborough,

Hawkes Bay, Central Otago) that derive a premium because consumers are willing to pay extra to enjoy the experience of

drinking their particular wine. The horticultural sector's ability to brand Zespri in a largely unbranded fruit sector is another

great success story.

Sustainability itself was not enough to create value added products for any of these companies. It was only once sustainability

was combined with other attributes that consumers value, namely products that are, of high quality, consistent, safe, and

ethically produced, that these companies were then able to create an authentic story about their products that resonated with

14

consumers. Without some of these other attributes, it is unlikely that the

sustainability story alone would have delivered the type of experience

that consumers were prepared to pay extra for. However, sustainability

is a very strong foundation for any farmer, F&A company, or entire

agricultural sector, to build a value-add strategy around.

Before embarking on a value add strategy it is important that a clear distinction is made between

price premium and margin improvement. For a value- add strategy to be worth pursuing the premium that is

generated must exceed the cost of achieving that premium.

Long-term Strategic Value

Sustainable farming has four main areas of potential long-term strategic value.

1. Future Proofing

As increasing numbers of regulators in developed countries implement measures to improve the environmental performance

of their food producers, the global supply of sustainably produced F&A products will continue to increase. At the same time,

both consumers and major F&A companies are demanding that the F&A products they purchase meet minimum sustainable

production standards. As an agricultural exporting country, ignoring these changing dynamics could create significant risks in

the future for New Zealand agriculture.

New Zealand is a country that relies heavily on its perception as being ‘clean and green’ producers of F&A products. This is a

reputation that has served New Zealand well in the past, and has the potential to do so in the future. However, it also exposes

New Zealand agriculture to the risk of severe reputational damage if our actual environmental performance is exposed as not

living up to this perception.

The tangible impacts of such reputational damage could range from consumers and/or F&A companies refusing to purchase

New Zealand products (or using it as leverage to pay less), through to potential market access restrictions. It is also conceivable

that poor environmental performance could be used as a trade barrier.

New Zealand’s geographic isolation has previously meant our offshore customers have had limited knowledge of New

Zealand’s farming practices. However, globalisation has made the entire supply chain more transparent. Consumers are doing

their research before making purchasing decisions, and environmental groups are ready and willing to expose any industries

that don’t deliver on their environmental promises.

15

New Zealand agriculture must be able to now demonstrate its ‘clean and green’ credentials, and back it up with verifiable evidence.

Implementing measures that improve New Zealand farming’s environmental performance now will help to mitigate these future risks.

2. Customer Intimacy

The basis of any successful business is understanding the needs and desires of consumers, and being able to tailor products

to meet those needs. However, consumer needs evolve over time. The world’s most successful companies are those that have

been able to continuously evolve their products to meet (or exceed) the changing expectations of their consumers. In doing

so, companies like Apple and Nike have been able to develop a level of intimacy with their customers that ensures long-term

loyalty to their products. The changing needs of global F&A consumers offers New Zealand the opportunity to grow consumer

loyalty by supplying agricultural products with the qualities consumers are seeking.

As much of the world’s population is becoming more affluent, many consumers are increasingly viewing food consumption as

an experience, rather than a simple function of daily life. High value international consumers are looking for food products that

have attributes that can facilitate or enhance their dining experience.

Food producers can now develop relationships with consumers in ways that were not previously possible, differentiating

themselves not just on taste and quality, but also on other attributes, including sustainability.

If New Zealand is able to sufficiently differentiate itself from its competitors based on its sustainability credentials, there is an

opportunity to get closer to global F&A consumers, and develop the type of consumer loyalty experienced

by Apple and Nike. Ultimately, these are consumers that would choose to purchase the New

Zealand sustainable product notwithstanding the price and/or quality offered by

competitors.

The challenge for New Zealand will be to clearly articulate a sustainability

message that resonates with overseas consumers. With the exception of

reduced GHG emissions, overseas consumers will not directly benefit from

New Zealand’s sustainable farming practices.

In addition, New Zealand is often not directly supplying to the end

customer. This makes it very difficult to develop a meaningful relationship

with end-consumers (and therefore to realise any value from the end-

consumer relationship). For these suppliers, the focus should be on

forming strong relationships with those F&A companies that see the

shared value in having a transparent, sustainable F&A supply chain.

16

3. Shared Value Supply Chain Relationships

Major F&A companies are heavily investing in ensuring transparency

and accountability upstream in their supply chain to maintain

the integrity and reputation of their products and brands.

The challenge for these companies is that they often source raw

materials from multiple suppliers, operating in multiple geographic

locations across the globe. As different suppliers operate under

different environmental and ethical regulatory requirements, it is

difficult for F&A companies to guarantee that the raw materials they

are sourcing have been produced using farming practices acceptable

to them.

SAI Platform companies, like Nestlé and Unilever, are required to devote

significant time and resource into assessing and verifying the sustainability

credentials of their upstream suppliers. This creates pressure on margins, as these

are costs that are difficult to recover from consumers.

This has resulted in a general movement towards greater operational consolidation at every level of the global F&A supply

chain. Long-term relationships are increasingly being formed between F&A companies and the suppliers they trust to

consistently deliver raw materials with the attributes they are seeking. These relationships are based around removing

inefficiencies from the supply chain and are designed to create shared value for all parties.

The fundamental shared value for involved parties is the certainty that such relationships provide. F&A companies are

guaranteed the ongoing, consistent supply of raw materials produced to the specifications they desire, while suppliers have

some certainty around future price and supply levels, reducing market volatility and giving confidence when making future

production investment decisions.

Adhering to robust environmental and ethical standards will help to position New Zealand farmers as credible and reliable sources of sustainable

agricultural produce in the eyes of major F&A companies.

This will increasingly create opportunities for suppliers to leverage New Zealand’s sustainability credentials and form long-term

relationships with global F&A companies that value sustainable and ethical food production. However, for these relationships

to be successful New Zealand suppliers must be prepared to not only comply with relevant national regulations, but also be

willing to meet supply specifications developed by these F&A companies to meet the needs of their end-consumers.

17

4 Social License to Operate

The actions of New Zealand farmers are being scrutinised more than ever before by the public, advocacy groups, and regulators. Urbanisation has meant

the majority of New Zealanders are now largely disconnected from the farming sector.

Expectations as to how farmers should operate are progressively being defined by media, environmental groups and social

networks.

The New Zealand public no longer simply accepts that farmers have a license to operate as best they see fit. Consequently,

industry controls and guidelines around health and safety, animal welfare, industrial relations, and the environment, have

increasingly given way to government regulation and controls.

To some degree, these regulations are the cost of doing business in a developed country. The production costs associated

with compliance experienced by farmers in countries like New Zealand, Australia, the United States, are generally always going

to be higher than those experienced by competitors in developing countries. However, it is important to remember that the

benefits of operating in a country like New Zealand, that has comparatively very high standards of infrastructure (transportation,

telecommunication, water, power); enforceable rule of law; minimal/no corruption; and significant government investment in R&D

and bio-security; normally far exceed any competitive disadvantage associated with operating under a stricter regulatory regime.

While some regulation of New Zealand agriculture is inevitable, it is important that farmers have the power to sufficiently

influence the final shape of any regulations impacting their future. This power to influence flows directly from agriculture's social

license to operate.

Adhering to improved environmental and ethical standards will go part of the way to closing the current gap between what is

expected of farmers by the public, and the reality of current farming practices. However, where expectations are unrealistic, or

misinformed, New Zealand agriculture must engage with the public to help them get a better understanding of how, and why,

New Zealand farms operate as they do.

Just as consumers need to be told a story about where New Zealand's food comes from and how it's produced, so too must the

public, to ensure there is an informed consensus as to what environmental and ethical standards are appropriate for farming in

New Zealand.

City dwellers in

New Zealand

70 % 85 % 90 % NEARLY

1956 1976 2016

in NUMBERS

Source: Statistics of New Zealand

18

FIVE STEPS TO SUSTAINABLE SUCCESS

There is no ‘one size fits all’ strategy for capturing the values discussed. However, there are certain key elements

that every sustainability strategy should contain if it is to be successful. These elements are relevant regardless of

scale, from small F&A companies supplying local markets, right through to entire agricultural nations attempting

to market themselves to the global marketplace as world leaders in sustainably produced food and drink. See Box

3 to learn about Ireland’s ‘Origin Green’ program.

1. Undertake thorough Research Have a clear understanding of exactly who the target customers are, and what are the specific sustainability

requirements of those customers.

If supplying F&A Processors/Manufactures/Retailers ascertain the precise sustainability attributes they look for when

sourcing their agricultural raw materials.

2. Have a Clear Sustainability Vision Organisations need to be clear about where they want their sustainability strategy to take them, and how they are

going to get there.

3. Define Sustainability There is no one universal definition of sustainability. Must be able to define what sustainability means, and identify

the tangible attributes that proves the sustainability promise is being delivered upon.

Scope of the sustainability definition will likely vary according to the scale of the organisation and

the target customers.

Small/medium F&A companies supplying local markets may choose a narrow definition that is linked to the

protection of the local environment and resources. Attributes measured could include water conservation;

air quality; energy efficiency and biodiversity protection.

Global organisations are likely to have a wider definition, and assess attributes relating to major global issues,

like greenhouse gas emissions, deforestation, natural resource depletion and global water scarcity.

4. Build Framework for Assessing Sustainability Performance

Organisations should establish a framework that enables them (and their customers) to easily assess and evaluate

their sustainability performance. Relevant sustainability attributes should be continuously assessed against

identified performance standards.

The assessment process should be simple and transparent (this may include independent assessments and

auditing where appropriate).

Utilisation of existing internal infrastructure, and/or collaboration with relevant external third parties,

is an efficient way to establish the required assessment framework.

5. Create a Story for Consumers Particularly important for organisations wanting to capture a price premium.

The value-add comes from linking sustainability to other attributes consumers value to tell

a story that differentiates the organisation, and its product/s, from competitors.

Qualities could relate to where products originated from, how they were produced, or how the

product is connected to the furthering of a particular environmental and/or social cause.

Must be able to clearly communicate the story in a way that resonates with target consumers.

s they

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 customers.

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tectiononononononon ooooooof ththththththhe ee e e e e lolololololocacccc l eneneneneneene vivivivivivirororororororonmnmnmnmnnn eneneneneneneent t ttt t and resources. Attrib

uality;y;y;y;y;;; eeeeeeennnennnn rgrgrgrgrgrggy y y y y y efefefefefefe fififififificicicicicicienenenenenenene cycycycycy aaaaaaaandndndndndnd bbbbbbbioioioioioioi diversity prot

organnnnnnnisisisisisisi ataaaaaa ioooooooonsnsnsnsnsnss areeeeee lllllllikikikikikikikkely to have a w

nhousususususussse eeeee gagagagagagasssss ss emissions, def

rame

19

11. Details from this section were taken from the “Origin Green Sustainability Report 2015”

Box 3

ORIGIN GREEN – IRELAND

In 2008 the Irish Food Board, Bord Bia, undertook

comprehensive research into the sustainability

requirements of its trade customers. Identifying

sustainability as a significant opportunity to maintain

and grow its industry, Bord Bia developed and

launched at the 'Origin Green' sustainability program

in the summer of 2012.

What is Origin Green?

Origin Green is an initiative to provide a structure

for Irish farmers and food and drink manufacturers to

demonstrate their commitment to sustainably produce

the highest quality food, drink and ingredients. It also

provides a framework to deliver long-term continuous

improvements in key areas such as emissions, energy,

waste, biodiversity and social sustainability.

How does it work?

Origin Green has separate specific requirements for

farmers, and for food manufacturers.

1. Farmers

Utilising Bord Bias’ pre-existing Quality Assurance

infrastructure, more than 100 farm auditors undertake on-

farm assessments focusing on measuring the key elements

identified as relevant from a sustainability perspective,

including:

Greenhouse gas emission

Biodiversity

Water conservation

Energy efficiency

Socio-economic factors

Following the on-farm assessment, each farmer receives

a feedback report that outlines their current performance

benchmarked against their peers. It also outlines

the potential

environmental and economic benefits from

improving performance in any areas that offer scope for

future development.

2. Food Manufacturers

Participating companies must develop a multi-annual plan

for its business which is at least three years in duration.

The plan must outline robust, measurable targets which

are relevant to their businesses in the areas of raw material

sourcing, manufacturing processes, and social sustainability,

with each plan being approved following independent

verification.

Progress so far

90,000 farms have been audited and carbon footprinted

(a world first)

Almost 800 independent farm audits are being

undertaken each week

470 food and drink manufacturers (representing nearly

95% of total food and drink exports) have registered to

take part

Exports from Origin Green verified members went from

€1.93bn in 2012 (79% Non-members vs. 21% Origin Green

members) to €7.84bn in 2014 (25% Non-members vs. 75%

Origin Green members) 11

“Ireland is leading the way in another important area – climate smart agriculture. Its Origin Green program has mobilised Irish farmers and food producers to set and achieve

measurable sustainability targets…we’re helping other countries learn from this model” Jim Yong Kim – World Bank President

For more information contact your local Rabobank branch

on 0800 722 622 or visit www.rabobank.co.nz

This document is issued by a Rabobank Group member. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by any Rabobank Group member to enter into a transaction. This information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any financial or strategic decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. All opinions expressed in this document are subject to change without notice. No Rabobank Group member accepts any liability whatsoever for any direct, indirect, consequential or other loss or damage howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of a Rabobank Group member. By accepting this document you agree to be bound by the foregoing restrictions. All copyright is reserved ©

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"The greatest opportunity to realise value in sustainability may lie

in the long term strategic value associated with being a globally

trusted source of sustainably produced agricultural products."Blake Holgate, Rural Manager, Sustainable Farm Systems, Rabobank New Zealand