The Carbon Neutral Dairy Farm. Is It Possible?

What does a dairy farmer have to do to become carbon neutral?

There has been much wailing and gnashing of teeth at the prospect of agriculture being included into New Zealand's Emission Trading Scheme (ETS). 

So I thought to my self, what would a dairy farmer need to do to become carbon neutral?

But first, why would a farmer what to be carbon neutral?

Some may say because it's the right thing to do for the environment.

Others will want to eliminate any tax paid on the carbon they emit. 

Other people will say that, being carbon neutral gives that farmer a wonderful point of difference in which to differentiate their products.

In order to avoid getting into a debate about whether climate change is real or not, I'm going to approach this from the marketing angle.

If a New Zealand farmer could produce a carbon neutral dairy product, then it should be able to fetch a sizable price premium and hopefully a greater profit.

This isn't a post about whether New Zealand should have an Emissions Trading Scheme (ETS) or even if agriculture should be included.

Rather this post is about what would a farmer have to do to be carbon neutral, what would it cost and can they make a profit from being carbon neutral.

What are the emissions from a dairy farm?

Its quite easy to calculate a farmers emissions and then simply buy carbon credits, but thats too easy and not much fun, and I doubt consumers will pay a premium for that story. 

The best resource on agricultural emissions and off setting options is this report by PA Handford and Associates.

To understand how to become carbon neutral we need to understand what emissions a dairy farm produces. There is carbon, nitrous oxide and methane.

1kg of methane emitted into the atmosphere is the same
as for 21kg of carbon dioxide.  Using the same scale, 1kg of nitrous oxide has the equivalent effect of 310kg of carbon dioxide.  Approximately two thirds of agricultural greenhouse gas emissions are as methane and one third is nitrous oxide.

As I understand it, there is no way of absorbing methane or nitrous oxide from the atmosphere, but we can absorb carbon from the atmosphere via trees and plants. So if a farmer emitted 1 kg of methane & 1 kg of nitrous oxide then they would need to offset (absorb) 321 kg of carbon to compensate. Because of this, these three emissions are combined into what is called a CO2-equivalent or NZU.

Dairy Farm case study  
This case study is based on a South Waikato dairy farm producing 210,000 kg milk solids (2007/08) from 535 cows on 178 ha.  Included in the operation is a 40 ha dairy run-off, 140 yearling heifers and 120 rising two year old heifers.  

As you can see from this table the emissions from fuel and electricity is a fraction of the total emissions. For a farmer to try and reduce those emissions by using solar power and wind turbines etc, will look like your're environmentally friendly. But will not have a great effect on the total emissions.

The big producer of emissions is the cows via nitrous oxide and methane.

The total emissions are 1929 tonnes of CO2 or NZU. This figure needs to be absorbed or sequestered. 

The carbon cycle

From what I can gather, trees need carbon to grow. As they grow they absorb carbon via photosynthesis. At 30 years of age a pine tree will have absorbed a certain amount of carbon and it will be contained in the tree.

If you were to chop the tree down at age 30 and burn the tree for fire wood, then all the carbon that has been absorbed by the tree, will be released back into the atmosphere. Which leaves you in the same point as you were 30 years earlier. Like wise if the tree falls down and decomposes, then over time the carbon will be released into the atmosphere too.

But if the tree is made into framing timber (for example) and used to build a house then the carbon stays locked in the wood. Which is what we want.

So how many trees to we need?

The report states,

However we have chosen a conservative figure of 22 tonnes CO2 /ha/yr for radiata pine. This has been calculated based on indicative forest sequestration tables for pruned and thinned radiata pine plantation on medium fertility site (Paul et al., 2008). By way of comparison we have chosen to use the average rate of 3 tonnes CO2 /ha/yr for reverting native bush, as described in the look up tables.

1 ha of 18 year old pine trees will absorb 22 tonnes of carbon per year. The above dairy farm has total emissions of 1929 NZU per year.

1929/22= 87ha!!!!

Wow! This farmer will need to have 87 ha planted in pine trees that are at least 18 years old, in order to be totally carbon neutral. That's 48% of the total farm area will need to be in trees! 

But its more complex than that too, because a hectare of 18 years old pine trees are absorbing the maximum amount of CO2 of its life. A stand of 5 year old trees is only absorbing a very small amount of CO2 and 10 year old trees are absorbing well below 22 tonnes.

So this farmer will also have to plant additional trees every year for 30 years and establish a mixed age forrest. 

For example this farmer would need to have 87 ha in mature forrest, they would harvest say 5 ha every year and then also plant 5 ha per year. This way they will always have 87 ha in forrest at any given time.

How do the numbers look?

A logical way for a farmer to approach this situation, is to buy 87 ha of trees. I'll assume that they are 18 year old trees, just to make things simple.

Lets say they buy some cheap land with a forestry block on it for $25,000/ha.

25K*87ha= $2,175,000

Assume that a 50% deposit of $1,087,500 is paid and the remaining balance is serviced over 30 years.

$1,087,500 @ 7% interest = $86,820/year.

This farmer needs to make an extra $86,820 to cover the cost of being carbon neutral. The farmer also needs to get a decent return for their investment, I'll assume a 25% return is appropriate return for such an investment.

The return on capital of 25% for an investment of $1,087,500 = $271,875/year.

The farmer will also need to bring in an extra $86,820 to cover the P&I of the loan.

So a total additional income of $258,695 would be required to meet the additional cost and a return on capital of 25%.

Assuming production stays the same at 210,000 kgms/year then the farmer would need a payout of $8.20 which is a 26% increase on the base payout of $6.50.

Which is actually quite possible, I think a 26% price premium is achievable.

Lets look at it another way.

Fonterra's milk brand, Anchor is selling for $2.30/litre at my local supermarket.

Our dairy farmer receiving a payout of $6.50 is actually receiving $0.52/litre for their milk. In order for this farmer to receive an additional $258,695, they just need to receive an additional 0.11/litre for their milk.

Lets pretend that Fonterra is selling this farmers milk as, carbon neutral milk. The farmer gets an additional $0.11/litre, I'll assume the processor/Fonterra adds an extra $0.11/litre to the price and finally the supermarket also adds $0.11/litre to the retail price.

Together they have added $0.33/litre to the price, that makes the final retail price $2.63/litre of milk. 

Even if I have underestimated my numbers, there is still lots of room to increase the retail price to compensate.

Organic milk is currently selling for over $3.00/litre.

Conclusion

What I wanted to show with this post is that it's not out of the realm of possibility to produce a carbon neutral dairy product and its not necessarily going to be obscenely expensive to produce either.

Obviously there are many questions around finding an appropriate forrest etc. For the record, I don't believe a pine forrest is a good carbon sequestration crop. Simply because it takes over a decade for it to start really absorbing carbon. There are a number of other plants/crops that can sequester the same amount of carbon/ha as a mature pine forrest, but can do it at 2-5 years of age. I'll post about these options another day. 

No one in agricultural circles are even contemplating a 100% carbon neutral product. All the talk is about how paying a small percentage of their carbon emissions is simply increasing costs with no benefit, and I agree. It is simply a cost increase with no increase in benefit.

To be partially in a ETS system is a half way compromise from a marketing standpoint. You have a cost increase but you can't go to carbon conscious consumers and ask for a premium price for your product, because you're not carbon neutral, or even close to being carbon neutral.

While the numbers above are a bit rough and ready, they show that being carbon neutral is possible and it would only require a 20-30% increase in retail price. Which is really quite achievable.

If you look at any product category, there is the cheap brand, the middle of the road brand, the expensive brand and the bloody expensive brand. The two most expensive brands will often be selling their products for 100-200% more than the mid point brands.

Lets look at eggs, mid point brands sell for .45c/egg and free range brands are selling for $1.00/egg. Thats an 122% increase in price.

For milk, all you need to do is get a 20-30% premium to make it worthwhile.

What would a carbon neutral block of cheese sold in London be worth?

Imagine the brand power and the story that could be told of a little country at the bottom of the world where the farmers use an integrated forestry farming system, that can produce a carbon neutral block of cheese. That gets shipped it to the other side of the world and still be affordable.

Well, affordable to rich people at least.

Thats pretty hard for farmers in other countries to copy.

Milk powder in a brown bag shipped to china is pretty easy to copy and pretty low value too.

Regardless of what you think about climate change. There is lots of opportunity and big margins out there for low carbon products.