Dairy processors will require a “well-balanced combination of carrots and sticks” in order to secure a reduction in on-farm emissions among their farmer suppliers, according to a recent report from Rabobank.
The report said that dairy companies are in a “delicate position” to balance the interests of their milk suppliers and other stakeholders, while tracking sustainability targets and maintaining healthy margins.
As well as that, current inflationary pressure across the entire value chain, increasing input costs, and high interest rates add more challenges to meeting greenhouse gas (GHG) emissions reduction targets.
Commenting on the report, Rabobank dairy analyst Richard Scheper said: “For dairy companies to reach the 2030 climate goals and beyond, accelerating the adoption of on-farm GHG emissions reduction measures is crucial.
“Reductions originating from productivity and efficiency gains may diminish over time and gains from new technologies may take years to achieve.”
According to Rabobank, dairy companies that set voluntary targets subject themselves to reputational and litigation risks if these targets aren’t achieved. Their market access could also be restricted or limited if competitors are meeting their own targets, and if the market demands that companies do so.
Reaching these targets requires a “well-balanced combination of incentivizing carrots and potentially corrective sticks” to accelerate the on-farm adoption of a wider variety of GHG emissions reduction tools, the bank said.
The report said that, globally, dairy companies are using incentives to facilitate this acceleration in their supply chains. Incentives are typically integrated in a company’s broader sustainability program for their milk suppliers, which often includes other environmental and/or animal welfare-related metrics.
Currently, most of the attention and rewards in incentivisation schemes are typically linked to tools that stimulate efficiency and/or productivity gains.
However, Rabobank’s report also said that dairy processors are generally unable to fund incentivising rewards from the marketplace, with most of the capital for these rewards currently originating from a reallocation of milk payments and company profits.
The report said that it is “of utmost importance” that all stakeholders in the value chain contribute financially to these efforts, with the growing need for incentives going forward.
These stakeholders must include not only the farmer and the end consumer, but also governments and banks.