Value in improved environmental performance

In the report, Sustainable Returns: Finding the value in Environmental Sustainability, Rabobank says two major types of value have been identified for farmers and food & agribusiness (F&A) companies from improved environmental practices – the immediate monetary benefit of these practices (from a price premium) and the long-term strategic advantages that provide growth and prosperity into the future.

Report author, Rabobank rural manager Sustainable Farm Systems, Blake Holgate says the type of value farmers and F&A companies can derive will vary depending on 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 achieve 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,” he says.

The report says 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 high-value international markets, where the vast majority of New Zealand produce is purchased, consumers are unlikely to pay a premium for New Zealand products just because farmers are undertaking sustainable farming actions as required by their Regional Councils,” Holgate says.

“To realise a price premium, food producers need to go beyond compliance and be able to build sustainability into a larger story about their product, where it came from, how it was produced, and what it stands for.”

The report cites merino wool clothing maker, Ice Breaker and Kiwifruit marketer, Zespri as New Zealand companies which have been successful at creating their own value added stories. However, it says, sustainability is only one element in their success and other attributes that consumers value – products that are high quality, consistent, safe and ethically produced – are required to create an authentic story that resonates with consumers.

“Without some of these other attributes, it is unlikely that the sustainability story alone would have delivered the type of experience that the 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,” Holgate says.

The report identifies four main areas in which sustainable farming has the potential to provide long-term strategic value for the New Zealand agricultural sector – future proofing, customer intimacy, shared value supply chain relationships and social licence to operate.

Holgate says it is essential the New Zealand agricultural industry keeps pace with the changing dynamics around environmental sustainability in order to future proof the industry from potential reputational damage.

“An increasing number of regulators in developed countries are implementing measures to improve the environmental performance of their food products. At the same time both consumers and F&A companies are demanding that the F&A products they purchase meet minimum standards and these trends will undoubtedly lead to an increased global supply of sustainably produced F&A products,” he says.

“New Zealand is a country that relies heavily on its perception as being “clean and green” producers of F&A products. This reputation has served New Zealand well in the past and has the potential to do so in the future. If New Zealand wants to continue to leverage this reputation, it’s imperative that our actual environmental performance lives up to the perception.”

The ability of New Zealand producers to grow customer intimacy by supplying agricultural products with the qualities consumers are seeking is highlighted as another potential area where long term strategic value can be developed.

Holgate says that with much of the world’s population becoming more affluent, many consumers are increasingly viewing food consumption as an experience, rather than a simple function of daily life, and are looking for food products that can facilitate or enhance their dining experience.

“If New Zealand is able to sufficiently differentiate from its competitors based on its sustainability credentials, there is an opportunity to get closer to global F&A consumers and develop increased customer loyalty. The challenge for New Zealand will be to clearly articulate a sustainability message that resonates with overseas customers who will not directly benefit form improvements in New Zealand’s sustainable farming practices,” he says. A further potential long-term strategic value identified in the report is the increased opportunity to develop shared value supplier 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 brands and products, the report says, and to do this they need to guarantee that the raw materials they are sourcing have been produced using farming practices acceptable to them.

“This is a real challenge for F&A companies given they often source raw materials from multiple suppliers, operating in multiple geographic locations across the globe who operate under different environmental requirements,” Holgate says.

“By adhering to robust environmental and ethical standards, New Zealand farmers can position themselves as credible and reliable sources of sustainable agricultural produce in the eyes of major F&A companies.”

The final area of potential long term strategic value highlighted in the report relates to farmers social license to operate.

The report says that with close to 90% of New Zealand’s population now located in cities, the majority of New Zealanders are disconnected from the farming sector.

“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 regulations and controls,” Holgate says.

“It is imperative that farmers have the power to sufficiently influence the final shape of any regulations impacting their future. This power to influence flows directly from agricultures social license to operate.

“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.”