New Zealand isn’t a country that comes up very often in charts of top CO2 emitting countries, but one company—Fonterra—deserves special attention. Fonterra is New Zealand’s largest company and employer, but to put its scale in a global perspective, consider that Fonterra accounts for 35% of global dairy exports, whereas Saudi Aramco, by way of comparison, accounts for 12% of global oil exports. Because cows produce both methane (a greenhouse gas 25 times more potent than CO2) and nitrous oxide (a GHG 300 times more potent than CO2), your average 1,300lb cow produces the equivalent of four tons of CO2 each year. This explains why cows (dairy and otherwise) accounts for 18% of all anthropogenic GHG emissions, a figure more than GHGs produced from driving cars (sorry Elon). Given both the scale of Fonterra and the scale of the challenge posed by animal-sourced GHGs, few other companies have as much potential to combat climate change through supply chain sustainability and innovation.
Company context today
Fonterra is a dairy co-operative owned by its suppliers, who are dairy farmers. Its business model is to run the supply chain and manufacturing plants than transform raw milk into dairy commodities (like whole milk powder, butter and cheese), and then either sell these commodities to CPG food companies, or further process them into branded consumer goods sold through supermarkets. In total, Fonterra has over 10,000 farmers, sells over 4 million metric tons of dairy products and ~$13bn USD of sales.
So far, the main impact of climate change on Fonterra has been political rather than regulatory or economic. New Zealand launched an Emissions Trading Scheme in 2008, but exempted its agriculture sector due to fears of losing market share to international competitors not subject to this type of increase in input costs. That said, Fonterra has been extensively criticized by Greenpeace and the New Zealand media for contributing nearly 20% to the country’s total greenhouse gas emissions. In response, the company has audited the sustainability practices of its entire supply chain and committed to a 20% reduction in its carbon footprint by 2020. Specific initiatives launched so far include:
- Reducing the number of cows needed to supply a given amount of milk (i.e., increasing productivity) through selecting breeding, reducing replacement rates, increasing fertility rates and increasing feed quality
- Reducing GHG emissions per cow through increasing use of nitrification inhibitors to slow the release of nitrous oxide and decreasing use of urea-based fertilizers
- Reducing GHG emissions in manufacturing and supply chain operations, through more efficient energy use
Future impact of climate change
As global temperatures continue to increase, Fonterra is likely to be affected by both the physical and regulatory impact of climate change. Increased atmospheric CO2 levels will favor increased pasture production but warmer temperatures reduce the quality of nutrition in grass, so the net impact on their milk supply is unclear. There are additional risks of proliferation of subtropical insects and hostile weeds, like kikiyu grass, which has already begun to spread in dairy farms in New Zealand’s North Island due to warmer temperatures. Furthermore, increased variability in severe droughts and floods globally increases the difficulty to accurately forecast global supply and demand of dairy commodities. Practically this means sales teams have less visibility into their markets’ demand for exports (which is largely determined by in-market domestic supply). Manufacturing teams similarly have less visibility into the optimal mix of products that need to be made to fulfil sales orders months in advance. So, although droughts and floods in China or Africa are thousands of miles away from New Zealand, they increase the probability of excess inventory or supply shortages, and therefore decrease profitability for Fonterra.
Potential solutions and opportunities
As the world’s largest global multibillion dollar enterprise based on cows, Fonterra is in a unique position to lead innovation in reducing methane and nitrous oxide emissions not just for dairy cows but for livestock more generally. Incremental solutions include further on-size optimization of feed quality, fertilizer use, irrigation levels and pasture species. Far more exciting, though, are solutions that have transformative potential to eliminate livestock GHG emissions altogether. Some of these include:
- Changing the microbiome of cows to remove the bacteria that produce methane, called methanogens. Potential solutions under development now include: vaccinating the cow to produce anti-methanogen antibodies, dosing cows with synthetic enzymes to break down methane, or genetically engineering alternative microbiomes
- Mechanically capturing the methane and harnessing it for later use as fuel (like the cow backpack in the photo above)
If any one of these solutions reduced or eliminated GHG emissions from cows, and if Fonterra developed the intellectual property, they would acquire immense potential to commercialize the technology to all other players in the livestock industry. (791 words).
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