How Arla farmers are rewarded for their sustainability activities

The Sustainability Incentive model is a point-based model that rewards past and future climate and environmental sustainability activities – and includes many options for farmer owners to choose from. Activities lead to points and every single point leads to a small amount of money on the milk price. The activities that have the potential to have the biggest improvement potential for climate and nature will lead to the most points – and therefore also the biggest financial incentive. From the start, the model will be funded through the raw milk value, but over time, the commercialisation of Arla’s future climate and environmental actions will help bring new money to Arla’s farmer owners.

Farmers are rewarded points for the activities that contribute (some directly and some indirectly) to lowering the farm’s carbon footprint and improving protection of nature and biodiversity. In total, there are currently 19 areas (we call these levers) that farmers can score points within (you can see them all in the illustration below). Currently, 80 points are available, but we expect to build more points into the model within the coming years, e.g. as new technologies become available. Each farmer will have to choose the activities that make most sense on his or her farm and may have to choose between some activities, so we don’t expect it to be possible for a farmer to reach the maximum amount of points on the current levers.

Points are scored based on data from our annual climate check as well as additional activities registered and documented digitally by the farmer. Levers with the biggest potential to reduce the farm's environmental impact lead to more points. On some farm management levers, there is a range of points that the farmer can achieve over time through continuous improvements. For example, a farmer can score between 1 and 13 points within feed efficiency depending on how much milk per unit of feed their cows produce.

It’s also important to say that not all levers have a direct influence on the farm’s carbon footprint. For example, the model rewards farmers for participating in knowledge building events, which in isolation doesn’t have an influence on the farm’s carbon footprint. We reward it because we see knowledge building and sharing as crucial enablers for the individual farmer’s journey to reduce his or her farm’s carbon footprint.

We are proud of being part of the dairy industry and bringing tasty dairy to the world, but we also acknowledge that dairy production emits CO2e and contributes to climate change. We are confident that it is possible to produce dairy with a smaller climate impact and we have a target of reducing our CO2e emissions from milk and whey by 30.3 per cent by 2030 from a 2020 baseline. The Sustainability Incentive model plays a key role in motivating and rewarding farmers to do even more to reduce their carbon footprint.

Based on the data from our annual climate checks, we have identified five activities that we currently believe have the biggest potential to reduce a dairy farm’s carbon footprint along with being some of the more feasible levers for farmers to do. We call them the ‘Big 5’. They are:

• Feed efficiency (More milk per feed input): A cow’s feed has a big influence on how much milk it produces. Feeding the cow with the right feed and in the right amount will optimize the amount of milk produced. When the climate footprint is allocated to more kilos of milk, the climate impact per kilo of milk will be reduced. Feed efficiency can also be expressed by keeping milk yield with use of less feed, which will lead to production of less feed. Optimizing feed efficiency requires a combination of smaller activities, rather than one clear strategy and will be individual from farm to farm. It is a constant balancing act of not feeding too much and not too little of the right blend of nutrients, to produce the best performance. Farmers can, for example, improve feed efficiency by focusing on diet composition (monitoring feed quality) as well as minimizing feed losses (from harvesting through storage and feeding).
• Fertiliser use (Reduce nitrogen surplus from feed production): All Arla farms will generate manure and most of this will be applied back to the ground as fertilizer for crop production. The manure is an extremely valuable resource, but it also results in nitrogen emissions. The amount of emissions depends on how the manure is stored and how and when it’s applied to the fields and what crops are grown. Where manure can't provide all of a crop’s nutrient requirements, mineral (artificial) fertilizer is used to supplement the nitrogen and other nutrients that are required. Applying additional fertilizers to the soil also results in greenhouse gas emissions (nitrogen). Optimal use of the nitrogen content from manure will reduce the need for commercial fertilisers and thereby also the total gross application of nitrogen.
• Land use (Better crop yields): Farmer owners utilize some of their land to produce feed for their cows. Optimizing and improving the crop yield used in cows’ feed, will enable a more efficient use of land. This lever is connected with fertilizer use, as crops need nutrients to grow and if fertilization is not optimized, the crop yield will be affected, and thereby more land is needed to produce the same amount of feed. Land use is also connected to feed efficiency as better feed efficiency reduces the need for feed and thus the land needed for feed production. Farmers can improve land use via precision farming to make the most of productive soils and direct the fertiliser where it can achieve the most payback. Another possibility is to choose crop varieties that provide a higher nutritional yield.
• Protein efficiency (Reduce protein surplus in feed ration): Cows need protein to stay healthy and produce milk but, like humans, cows excrete unnecessary protein, causing unnecessary CO2e emissions. Homegrown protein sources and bought-in protein concentrates are efficient ways of delivering additional protein to a cow in a small package. Carefully balancing the right amount of protein that the cows need will, in most cases, lead to better utilization of protein by the cow and limit the protein in the cow’s feed, resulting in less nitrogen being excreted. Farmers can, for example, improve protein efficiency by optimizing protein levels in the feed and optimizing feeding plans.
• Animal robustness (Healthy cows): Cows that live a long and healthy life will produce more milk over their lifetime. A longer lifespan means that the CO2e footprint of the cow, including the share that comes from heifer breeding, is distributed over a longer period and a larger milk quantity. When it no longer produces milk, a healthy dairy cow is used for production of beef, which leads to a lower footprint on the milk as part of the footprint is allocated to the beef. Farmers can improve animal robustness by maintaining barns, tracks and grazing areas to support good animal health as well as closely monitoring the cows’ health.

The Sustainability Incentive model rewards both current and future activities and includes levers that are relevant for the different farm systems in the Arla cooperative. Farmers are rewarded for past activities, because these have contributed (directly or indirectly) to lowering Arla's total CO2e emissions through the years, and it’s important that these activities will continue.

Farmers will receive 1 eurocent per kilo milk for submitting climate check data, which is the prerequisite for receiving the sustainability incentive. The model is designed to reward farmers with up to 3 eurocent per kilo milk. That may seem like a small amount, but based on Arla’s owners’ milk volume in 2021 and the one eurocent that farmers will receive for submitting their Climate Check data, it corresponds to 500 million euro being earmarked for rewarding on-farm climate and environmental activities. However, we don’t expect it to be possible to reach the maximum amount of points, because each farmer will have to choose the activities that make most sense on his or her farm. In the first full year, at least 270 million euro (based on the total milk volume in 2021) is expected to be distributed through the monthly milk price based on what the farmers are doing on the 19 levers in the model with an estimated average of 39 points scored in the model in the first full year.

From the start, the model will be funded through the raw milk value as Arla has done for similar incentives (e.g., the Climate Check Incentive). But over time, Arla Farmers’ future climate and environmental actions will help bring new money into Arla and the milk price through commercialisation. We are confident that rewarding our farmer owners for their activities will send a clear message to customers and consumers that a share of the price they pay for more environmentally sustainable Arla products is directed to Arla farmers and the farmers who do the most activities to lower their farm’s carbon footprint and improve protection of nature and biodiversity will be rewarded the most. The Sustainability Incentive Model is an essential element in delivering a more competitive milk price.

The levers that we’ve included in the Sustainability Incentive model are founded on data from our climate checks and consultancy from external experts. The levers aim to motivate the activities that we’ve identified as the potentially most impactful, feasible and cost-efficient for Arla’s farmer owners to lower their farm’s carbon footprint and improve protection of nature and biodiversity towards delivering our 30.3% CO2e reduction target for milk and whey that we’re working towards by 2030 (with a 2020 baseline). Feasibility is defined as e.g., technological maturity, availability and scalability across farms. There will be variations from farm to farm, where some farmers will see bigger CO2e reductions or improvements than others.  In the unlikely event that a farmer chooses to focus only on the biodiversity lever and knowledge building lever there will of course not be any CO2e reductions. The model as a whole has been reviewed by agricultural experts from SEGES who concluded that the model will lead to greenhouse gas reductions per average kilo milk produced at our owners’ farms meaning that the carbon footprint of the milk pool as a whole will be reduced.

It is not possible to say exactly. The CO2e reduction target is an overall target for Arla and not a target for the individual farmer, and some farmers will be able to contribute more than others. While we’re confident that the Sustainability Incentive Model will play a key role in lowering our average carbon footprint per kilo milk, it’s important to say that there’s not a direct correlation between points and the effect on CO2e reduction impact. Some levers won’t have a direct impact on CO2e reductions, but are included because we see them as enablers for CO2e reductions like attending learning courses about running a more sustainable dairy farm or because they will improve the farm from another environmental perspective than CO2e reductions like the levers that will preserve or improve protection of nature and biodiversity.

Part of the data that the farmers are awarded points for comes from our annual climate check, while the rest is based on the farmers reporting and uploading of documentation, e.g. certificates for purchase of green energy. To make sure that the climate check data is reliable, we have put the following measures in place:

• Climate Check advisors sense check: As part of the annual Climate Check process, external advisors will review the farm data submitted by the farmer, comparing to last year’s data and work with the farmer to correct any typos, missing data or other obvious mistakes.
• Outlier check: The external climate check advisor submits data to Arla for calculation and data set compilation, and any data points that differ considerably from previous entries or that are statistically or biologically implausible – will be highlighted to the external advisor. If the advisor cannot find the mistake, the Climate Check is forwarded to Arla to be checked.
• Final dataset evaluation: When data collection for the annual climate check has been completed, Arla checks the whole dataset for odd or missing information.
• External review by Ernst & Young: External review by Ernst & Young: The final climate check results receive the highest possible assurance level as part of our group audits. Read Ernst & Young’s Reasonable assurance statement for Arla’s ESG reporting in our Annual report (page 146).

For the levers where farmers self-report on their work, we have internal verification processes to identify possible irregularities. These checks are performed on an ongoing basis.

Data from the Big 5 and sustainable feed categories will come from the Climate Check. Consequently, this data will only be re-calculated annually, whereas data on the other levers can be re-calculated on a quarterly basis, meaning that farmer owners can update their information and get points from the next quarter if status on these levers has changed.

The incentive will be included every month in the milk price payment if the farmer has participated in the annual Climate Check. The milk price varies on a monthly basis, while the Sustainability Incentive is set at 0.03 eurocent per kilo milk per point scored in the Sustainability Incentive Model in addition to 1 eurocent per kilo milk for completing the Climate Check. Based on data from the Climate Check, the incentive points will be recalculated annually. In addition to this the farmer has an opportunity throughout the year to upload documentation for additional activities, which will then be rewarded with points from the next quarter.

As part of the annual Climate Check, Arla farmers will have their individual CO₂e level measured, but the Sustainability Incentive Model does not reward Arla farmers based on their individual CO2e level. It has been a central principle for the Board of Directors during the development process of the model, that the model is fair for all farmers and therefore the Sustainability Incentive Model focuses on rewarding activities in tangible farm management areas, which we know our farmers will be able to act on and which will lower the on-farm CO2e emissions on an overall level and help Arla meet its collective target of 30.3% reduction of CO2e from milk and whey by 2030 from a 2015 baseline.