Cost-Benefit Analysis Certification in Argentina and Brazil - IFC

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Cost-Benefit Analysis Certification in Argentina and Brazil - IFC

Executive summary (2/2)This study shows there is a business case for medium (2.5k Ha – 10k Ha) and large (>10k Ha) producers to certify under RTRS, assuming benefits thatappear reasonable in the soy sector• The business case depends on the producer type, with size and the initial level of professionalism (in terms of internal controls) being key determinants• Even for medium producers in Brazil that have no significant internal controls in place, RTRS certification can result in an average benefit of $0.80 on everyton sold over a 7 year period.• The benefits of certification can cover some of the costs of investments required for national law compliance, but only to a very limited extent due to the size ofinvestments required.Key challenges for RTRS relate to matching supply and demand, facilitating benefits, and reducing costs• Adopt a segemented approach to further strengthen the business case for RTRS. Smaller producers have other needs than larger producers.• In this approach, work on direct benefits, demand drivers, markets and cost reduction.• To promote the consistent payment of a healthy price premium, RTRS should continue its facilitation in matching supply and demand, both by working morewith traders and crushers, and exploring opportunities for leveraging the networks of other certification schemes.• The recently announced colaboration with GMP+ is a good example of such efforts.• RTRS could seek out deals with sector players in order to be able to offer benefits such as input and financing discounts.• RTRS could facilitate cost reductions by simplifying and/or standardising internal control requirements, by developing a standardised software package forinternal controls, and by negotiating set fees for external audits.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.3


Table of Contents1. Model design 62. Model outcomes - Producer perspective 123. Summary of recommendations and next steps 244. Appendix- Glossary 28- List of sources 29- Model tree (extended version) 32- Internal control system cost 33- Effect Good Agricultural Practices on business case 35- Key assumptions 37© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.4


Model designModel Input: Archetypal producersCommentsIdentified producergroupsAssumed level of RTRScomplianceRegion in which thisproducer type isassumed to be foundBrazilArgentinaClose to Far fromClose to Far fromcertification, certification, Major certification, certification,medium size medium size producers medium size medium sizeHigh Low Variable High LowSouthernNorthernMato GrossoMato GrossoMato GrossoGoias, MinaisMAPITOBAMAPITOBAGerais, MSZona Nucleo Zona NucleoOverview of selected producer types in BrazilNote: (1) The archetypal productive area is the■■■On request of IDH we have focused oursurvey efforts on three producer groupsin Brazil and two producer groups inArgentina, of which the ‘archetypal’producer is described in this overview.Interviewees found this segmentationinto producer groups relevant andunderstandable.For Brazil, we have assumed that majorproducers and producers close tocertification are compliant with LegalReserve, in other words, they do notneed to buy or lease additional acreageof land to maintain their production.Typical farm mgt. systemTypeSelf managedfarm byownerEstablishedfarms (>20years) inCerrado areaSelf managedfarm byownerExpansionfarmssituatedrecently (


Model designKey costs relating to RTRSOverview of costsCommentsItemCompliance with forest lawsCost of land purchase (interest cost)Cost of reforestationLegal & technical adviceRegistration environmental licenseArea of permanent protection (APP)Compliance with labour lawsEmployee housing improvementLabour legislation (paying official wages)Protective equipmentNationalLawRTRSModeled© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.Incl in RTRSbusiness caseCommunity relations Regulation (agro)chemicals, incl wasteStorage facilitiesTriple washing facilitiesWaste storage unitFuelling stationComplying with R'dam/Stockholm conventions Buying seeds through official channels Set-up ICS (incl. training workers/contractors)Training of workersConsultancy / ‘implementator’Information management softwareMaintaining management systemAdministrative supportInternal auditAudit costs Variable RTRS fees (€0.3/Mt) Logistics costs relating to mass balance requirements NCosts of introducing crop rotation G 1 1■■■The model contains costs as well asbenefits. This overview presents anoverview of all costs included.There is extensive overlap betweennational law and RTRS requirements,both in Brazil and Argentina.RTRS-specific requirements relatemainly to record keeping, communityrelations and sustainable agriculturalpractices such as crop rotation.Key 1GNIncludedAssumes that ‘Close tocertification’ requires half of ‘Farfrom certification’ FTE due tomanagement system already inplace‘Good agricultural practice’, seeAppendix for more detail.No substantive informationavailable8


Model designKey benefits relating to RTRSOverview of benefitsCommentsItemNationalLawRTRSModeledRevenue from (re)forested land Avoided non-compliance costs © 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.Incl. in RTRSbusiness casePremium SInput discount SFinancing discount SEfficiency due to well documented structure and procedures NFit for the future (ability to adopt to new business standards) NImproved stakeholder engagement NLong-term productivity improvement GLand value increase NReduction input use GCost reduction due to fewer accidents GHealth benefit from prudent agrochemical use GReduction in legal costs from agrochemical contamination NAccess to better lands for lease NAccess to European markets now or in the near future NKeySGNIncludedIncluded in business casecalculation as a possiblescenario‘Good agricultural practice’,see Appendix for more detail.No substantive informationavailable■■■■■There are many potential benefits ofRTRS mentioned by producers andothers during our study.‘First movers’ mention the advantagesof having a better company today andtomorrow (well documented structureand procedures), getting a psychologicalboost from receiving the certificate andhaving a better relationship with differentstakeholders. Some of the producersalso believe that standards like RTRSwill become business as usual within 5-10 years.The data points received on these andother benefits (N and G in table) duringthe interviews are, however, notconsistent, or little quantitative evidencewas found. And some benefits cannotbe attributed to RTRS but are a result ofNational law compliance.Therefore, the benefits of RTRS wehave used in our model are premium,input discount, and financing discount.The beneficial effects of ‘goodagricultural practice’ have not beenmodeled as opinions and evidence onthis are strongly divergent. However, itseems that there exists a possibility thatyield and/or cost savings effects can besignificant and contribute to the businesscase, particularly for smaller producers(


Model designModel tree RTRS certificationModel treeComments+Costs of certification(cost/farm)Returning cost (ICS, equipment, labor etc.)+System cost (RTRS fees, audits)+Impact of RTRS one-off investments■■The transition costs as well as benefits,for producers moving to RTRS aredescribed in this tree. A more elaborateversion can be found in the Appendix.It was not possible to include thepotential cost-benefits of GoodAgricultural Practices (GAP) in the modelanalysis. These are illustrated in theAppendix.Impact of National Law one-off investmentsProducer-level cost andbenefits of transition toRTRS(cost/farm)+Cost of compliance withnational law(cost/farm)+Interest /lease cost for compensatory land ($)+∆ Gross margin ($)Avoided non-compliance cost ($)-Benefits of compliancewith law/ RTRS(cost/farm)+Yields from forest ownership ($)+Interventions: Premium, discounts© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.10


2. Model outcomes- Producer perspective


Model outcomeCost overview ArgentinaOverview of costs / benefits for a producer far from certification in Argentina (US$ / MT, average for 7 years)CommentsCost of legal compliance 1BenefitslegalcomplianceCosts of RTRSBenefitsof RTRS■The graph shows the costs and benefits ofcertification for an Argentinean producer farfrom certification.■In Argentina, most producers in the ZonaNucleo, where >80% of soy is farmed, aresituated in areas designated by thegovernment as ‘Green’, which require noconservation measures.■The staff time required to maintain themanagement information system and toconduct internal audits is assumed todecrease over time as these proceduresbecome increasingly integrated in dailybusiness routine.■National law compliance costs relate mainlyto compliance with labour legislation in thearea of paying official wages and health &safety, which may require shifting to higherquality contractors.■The business case on page 14 onwardsfocuses strictly on RTRS-related costs andbenefits.Producer: Far from certSize: 2.500 haPremium: €1,50 for 7 yearsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: Year 1Note:(1) Costs for national law compliance are not exhaustive, only key costs have been included© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.13


Model outcomeCost overview BrazilNote:Overview of costs / benefits for a producer far from certification in Brazil (US$ / MT, average for 7 years)Cost of legal compliance 1BenefitslegalcomplianceCosts of RTRS(1) Costs for national law compliance are not exhaustive, only key costs have been includedBenefitsof RTRSProducer: Far from certSize: 2.500 haPremium: €1,50 for 7 yearsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: Year 1© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.■■■■■■CommentsThe graph shows the costs and benefits ofcertification for a Brazilian producer far fromcertification.Brazilian soy producers, which can belocated in sensitive ecological areas, arefaced with legislation relating to forestconservation.A large part of costs relating to nationalcompliance relate to the ‘Legal Reserve’(LR) required by the Forest Code and toPermanent Protection Areas (APP).Literature study indicates an LR deficit inMato Grosso of 11-26% and an APP deficitin range of 3-5% (Sparovek et al., 2010). Weassume 26% for LR and a 3% APP deficit.*LR compliance results in costs forrenting/buying forest land, while APP resultsin lower productive acreage and costs ofreforestation.It is assumed that producers are able to buyland in order to compensate for LegalReserve requirements on productive land.Benefits of national law compliance relatemainly to income from the harvesting ofindigenous trees and the avoidance of fines.The business case on the following pagesfocuses strictly on RTRS-related costs andbenefits.* Assumptions on Forest Code are based on theavailable knowledge on 15-5-2012 , whenthe new Code was not yet finalised.14


Model outcomeBusiness case for Argentinean medium size producerCost-benefit analysis over timeCommentsAverage cumulative cost-benefit to date (USD / MT) ■ A robust business case can bemade for RTRS certification,although this is dependent on acombination of benefits, including apremium and discounts on inputsand financing.Producer: Far from certSize: 2.500 haPremium / priceinternalisation: €1,50 for 7 yrsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: 2012Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Volume produced 7.500 7.500 7.500 7.500 7.500 7.500 7.500 7.500 MTVolume RTRS 0 7.500 7.500 7.500 7.500 7.500 7.500 7.500 MTImpact of RTRS cost (7.586) (28.527) (21.949) (17.649) (14.221) (9.849) (9.849) (10.721) USD/farmerCost impact RTRS as % of total operationalcosts0,3% 1,1% 0,9% 0,7% 0,5% 0,4% 0,4% 0,4%Impact of RTRS benefits (incl. EUR 1,5premium)- 27.396 27.396 27.396 27.396 27.396 27.396 27.396 USD/farmerRTRS Cost minus benefit (7.586) (1.131) 5.447 9.747 13.175 17.547 17.547 16.675 USD/farmerAverage cumulative cost-benefit to date NA -1,16 -0,22 0,29 0,66 0,99 1,22 1,36 USD/MT■■■Compared to Brazil, the staff timerequired for the informationmanagement system will besomewhat lower in Argentina as a lotof the required data is provided bythe contractors. Further detail aboutinterviewees’ indications on stafftime required can be found in theAppendix.Costs related to national lawcompliance are not included in thisbusiness case.After 7 years, this producer will havehad a net benefit of US$1,22 onevery ton sold in those 7 years.Shows for each year the average cost/benefit on every MT of soy sold up to and including that year© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.15


Model outcomeBusiness case for Argentinean medium size producerAverage cumulative cost-benefit to date (USD / MT)Cost-benefit analysis over timeProducer: Close to certSize: 2.500 haPremium / priceinternalisation: €1,50 for 7 yrsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: 2012■■■CommentsProducers in Argentina which areclose to certification are alreadycompliant with national lawsregarding labor circumstances,minimum wages and agrochemicalusage.A law compliant producer inArgentina benefits more fromcertification than a non-lawcompliant producer.After 7 years, this producer will havehad a net benefit of US$1,79 onevery ton sold in those 7 years,suggesting there would be abusiness case even if the benefitswere lower.Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Volume produced 7.500 7.500 7.500 7.500 7.500 7.500 7.500 7.500 MTVolume RTRS 0 7.500 7.500 7.500 7.500 7.500 7.500 7.500 MTImpact of RTRS cost (7.586) (20.277) (16.449) (14.899) (14.221) (9.849) (9.849) (10.721) USD/farmerCost impact RTRS as % of total operationalcosts0,3% 0,8% 0,7% 0,6% 0,6% 0,4% 0,4% 0,4%Impact of RTRS benefits (incl. EUR 1,5premium)- 28.911 28.911 28.911 28.911 28.911 28.911 28.911 USD/farmerRTRS Cost minus benefit (7.586) 8.634 12.462 14.012 14.690 19.062 19.062 18.190 USD/farmerAverage cumulative cost-benefit to date NA 0,14 0,90 1,22 1,41 1,63 1,79 1,88 USD/MTShows for each year the average cost/benefit on every MT of soy sold up to and including that year© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.16


Model outcomeBusiness case for Brazilian major producerCost-benefit analysis over timeCommentsAverage cumulative cost-benefit to date (USD / MT) ■ For major producers in Brazil thereis a strong business case for RTRScertification.Producer: Major producerSize: 30.000 haPremium / priceinternalisation: €1,50 for 7 yrsFirst campaign as RTRS: 2012Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Volume produced 90.000 90.000 90.000 90.000 90.000 90.000 90.000 90.000 MTVolume RTRS 0 90.000 90.000 90.000 90.000 90.000 90.000 90.000 MTImpact of RTRS cost (17.384) (167.347) (103.796) (99.080) (105.364) (80.364) (80.364) (91.364) USD/farmerCost impact RTRS as % of total operationalcosts0,1% 0,9% 0,6% 0,6% 0,6% 0,4% 0,4% 0,5%Impact of RTRS benefits (incl. EUR 1,5premium)- 174.376 174.376 174.376 174.376 174.376 174.376 174.376 USD/farmerRTRS Cost minus benefit (17.384) 7.029 70.581 75.296 69.012 94.012 94.012 83.012 USD/farmerAverage cumulative cost-benefit to date NA -0,12 0,33 0,50 0,57 0,66 0,73 0,75 USD/MT■■■■Shown here is the business case fora major producer that already has abasic management informationsystem in place.Costs related to national lawcompliance are not included in thisbusiness case.The producer is assumed to receive€ 1,50 in premium for 7 years.Benefits from discounts on financeor input costs are not included.After 7 years, this producer will havehad a net benefit of US$0,73 onevery ton sold in those 7 years,suggesting there would be abusiness case even if the benefitswere lower.Shows for each year the average cost/benefit on every MT of soy sold up to and including that year© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.17


Model outcomeBusiness case for Brazilian medium size producerAverage cumulative cost-benefit to date (USD / MT)Cost-benefit analysis over time■■CommentsIn the context of a medium-sizedproducer close to certification inBrazil, the business case surpassesbreak-even in year 2.After 7 years, this producer will havehad a net benefit of US$1,51 onevery ton sold in those 7 years.Producer: Close to certSize: 2.500 haPremium / priceinternalisation: €1,50 for 7 yrsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: 2012Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Volume produced 7.500 7.500 7.500 7.500 7.500 7.500 7.500 7.500 MTVolume RTRS 0 7.500 7.500 7.500 7.500 7.500 7.500 7.500 MTImpact of RTRS cost (4.195) (25.532) (19.137) (16.766) (16.766) (10.895) (10.895) (13.266) USD/farmerCost impact RTRS as % of total operationalcosts0,2% 1,1% 0,8% 0,7% 0,7% 0,5% 0,5% 0,6%Impact of RTRS benefits (incl. EUR 1,5premium)- 28.682 28.682 28.682 28.682 28.682 28.682 28.682 USD/farmerRTRS Cost minus benefit (4.195) 3.150 9.545 11.916 11.916 17.787 17.787 15.416 USD/farmerAverage cumulative cost-benefit to date NA -0,14 0,57 0,91 1,08 1,34 1,51 1,59 USD/MTShows for each year the average cost/benefit on every MT of soy sold up to and including that year© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.18


Model outcomeBusiness case for Brazilian medium size producerAverage cumulative cost-benefit to date (USD / MT)Cost-benefit analysis over timeProducer: Far from certSize: 2.500 haPremium / priceinternalisation: €1,50 for 7 yrsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: 2012■■CommentsShown here is the business case fora medium-sized producer that stillhas to take all the necessary stepsto meet RTRS requirements,including setting up and maintaininga management information system.After 7 years, this producer will havehad a net benefit of US$0,80 onevery ton sold in those 7 years.Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Volume produced 7.500 7.275 7.275 7.275 7.275 7.275 7.275 7.275 MTVolume RTRS 0 7.275 7.275 7.275 7.275 7.275 7.275 7.275 MTImpact of RTRS cost (4.514) (36.226) (26.241) (20.280) (16.690) (10.818) (10.818) (13.190) USD/farmerCost impact RTRS as % of total operationalcosts0,2% 1,4% 1,0% 0,8% 0,6% 0,4% 0,4% 0,5%Impact of RTRS benefits (incl. EUR 1,5premium)- 26.731 26.731 26.731 26.731 26.731 26.731 26.731 USD/farmerRTRS Cost minus benefit (4.514) (9.495) 490 6.452 10.042 15.913 15.913 13.542 USD/farmerAverage cumulative cost-benefit to date NA -1,93 -0,93 -0,32 0,10 0,52 0,80 0,95 USD/MTShows for each year the average cost/benefit on every MT of soy sold up to and including that year© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.19


Model outcomeAdditional funding options for Argentinean producerCost-benefit analysis over timeCommentsAverage cumulative cost-benefit to date (USD / MT) ■ Several funding sources are available toRTRS certified producers.■■■■The blue line shows the effect of apremium, finance discount and inputdiscount identical to the one described onthe previous page.The green line shows a scenario whereearly movers receive an additional 3 yearbenefit on RTRS through a ‘first moverfund’.Producers could benefit from a premiumon biodiesel (purple line). Pre-condition toreceiving this premium is a better uptakeof RTRS certified biodiesel.The biodiesel premium matches the aftertaxcrusher premium received on certifiedbiodiesel exported from Argentina. Thelevel of USD 3,60 in biodiesel premiumpresumes 80% of premium is forwardedfrom crusher to farmer. Recognition ofChain of Custody requirements ofstandards that dominate the biofuelmarket could expand the window ofopportunity to realize this premium.Base case:Premium / price internalisation:€1,50 /Mt for 7 yrsInput discount: 1,2%Finance discount: 50bpFirst mover funding:Premium / price internalisation: €1,50for 7 yrsInput discount: 1,2%Finance discount: 50bpEarly mover funding: USD 0,50/Mt (3yrs)Biodiesel premium:Biodiesel premium: USD 3,60 /Mt ofbeansInput discount: 1,2%Finance discount: 50bpCountry: ArgentinaProducer: Far from certSize: 2.500 haFirst campaign as RTRS: 2012© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.20


Total cost / MT(including legalcompliance)Model OutcomeCosts allocation per category of expenditureCost-analysis – scenarios (US$ / MT, average for 7 years)Comments■This graph shows total transitionalinvestments per farmer. The costfigures includes costs for legalcompliance and excludes benefits.MediumCloseBrazilMediumFarMajorMediumCloseArgentinaMediumFar■As GAP benefits were not quantified,these do not appear in this overview.Average level of benefit givena €1.50 premium, inputdiscount and financingdiscount: $4,58Key© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.21


Share of costModel OutcomeCosts allocation per category of expenditureCost-analysis – scenarios (US$ / MT, average for 7 years)Comments■This graph shows how the costsshown on the previous slide aredistributed over five categoriesidentified by IDH.MediumCloseBrazilMediumFarMajorMediumCloseArgentinaMediumFar■When considering total costs thathave to be made to reach RTRScompliance (including legalcompliance costs), it is clear that theLegal Reserve requirement in Braziltakes a large share of costs.■If a business case exists for RTRScertification (requirements for ICS andsystem costs are met), additionalfunds invested contribute tobiodiversity, labour and communityrelations.■The share of cost dashboard showshow money invested in differentarchetypal producers contributes tothese categories.■As GAP benefits were not quantified,these do not appear in this overview.Key© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.22


3. Summary ofrecommendations and nextsteps


RecommendationsBuilding blocks to improve business case for RTRS certificationBuilding blocks to improve the business case for responsible soyComments■■■■Demand driversEnsure more publicity on transactions to buildtrust in the prevalence of a RTRS premium.Promote RTRS certification of biodieselwarehouses / refineries in EuropeConsider recognition chains of custody auditedby other standards.Communicate that €0.30 fee applies only totraded RTRS soy.Benefits■■■BenefitsEncourage better utilization of financediscount.Combine certification with negotiatied inputdiscount.Promote RTRS as additional reward forcompanies that manger to reach legalcompliance.Demand drivers■■■■Cost reductionCollectively negotiated audit fees for smallerproducers.Free training for small producers.Standardised management software.Focus audit on outcomes rather than process.MarketingCost reduction■■■MarketingBetter known RTRS could support negotiatinglease contracts with landowners.Better known RTRS could make perceived gapto implementation for producers smaller asthey know what is expected.Acknowledge existing producer standards asequivalent to RTRS.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.24


RecommendationsKey levers for RTRS soy – reduce ICS, ensure premium and /or a reasonable inputdiscountOverview of key levers for achieving ‘break-even’ for a producer far from certification in Brazil (1)Break –even analysisOriginal cost/benefit -$0,49Target cost/benefit $0,00OriginalvalueTargetvalue to reachbreak even (2)1,25 FTE 0,49 FTEBRL 10.785 BRL 1.800€0,30 -€0,08€0,50 €0,881,2,% 1,47%50 bp 119 bp© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.FeasibilityProducer: Far from certSize: 2.500 haPremium: €0,50 for 7 yearsInput discount: 1,2%Finance discount: 50bpFirst campaign as RTRS: Year 1(1) Each lever shown can enable break-even at target value while all other values remain unchanged(2) Changing target value to reach break-even within 7 years, while all other values keep the original value.■■■■Key:CommentsIn this slide a number of levers areshown which could be used toimprove the business case of RTRScertifiedsoy on the producer level.The ‘original value‘ is the valuemodelled for a medium size Brazilianarchetypal Brazilian producer which isfar from certification (except forpremium which is lower). The ‘targetvalue’ indicates how this value shouldbe changed to reach break-even witha 7 year time horizon perspective,provided all other values remainunchanged.The most promising levers to promotethe RTRS business case appear to liein ensuring a healthy premium level,and/or a reasonable input discount.A further promising lever relates toreduced internal control (ICS) costs,which could be facilitated by theRTRS organization by developing astandardized informationmanagement system and/orspreading best practice.Level of feasibilityHighMediumLow25


RecommendationsRTRS segmentationLarge producers> 5.000 HaMedium producers1.000 – 5.000 HaSmall producers< 1.000 HaSegmented approach Comments■ RTRS can be a good business casefor producers but certain conditionsneed to be in place. To improve thebusiness case we propose asegmented approach.• Access to market• Sustainability credentials• Premium• Premium• Finance & input discounts• Lease negotiation position• Productivity improvement• Facilitate standardised ICS• Free RTRS training• RTRS ‘light’ option■■■■The investment for smaller producersis currently too large as they cannotbear the administrative burdenrequired for compliance, such that amore accessible version of RTRS maybe developed especially for them.Although costs for small producersare highest, their gains from applyingGood Agricultural Practice could alsobe highest.Medium producers would besusceptible to benefits like financediscounts, resolving legal complianceor input discounts.Large producers’ certify under RTRSin order to ensure access to marketsand fortify their sustainabilitycredentials, while their biggestconcern is the insecurity surroundingRTRS demand, the payment ofpremiums, and whether they wouldneed to pay the RTRS fees up-front.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.26


Appendix


AppendixGlossaryAbbreviationsACAPPbpBRLEURForest CodeFTEGAPGMPICMICSIPMISCCLRMAPITOBAMSMTP&LREDRSPORTRSUSDAgricultural CertificadaPermanent Preservation Areabasis pointsBrazilian RealEuroBrazilian Law on the preservation of native vegetationFull time equivalentGood Agricultural PracticeGood Manufacturing PracticesIntegrated Crop ManagementInternal Control SystemIntegrated Pest ManagementInternational Sustainability & Carbon CertificationLegal ReserveMaranhao, Piauí, Tocantins, BahiaMato Grosso do SulMetric TonProfit and LossRenewable Energy Directive or EU Directive 2009/28/ECRound Table for Sustainable Palm OilRound Table for Responsible SoyUS Dollar© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.28


AppendixList of sources (1/3)List of intervieweesInterviewee Type of organization CountryLos Caldenes Mid-sized producer ArgentinaAAPRESIDSoybean farmer organization –Farmer cooperation / mid-sized farmersArgentinaSolidaridad Argentina NGO ArgentinaRTRS secretariat Scheme owner ArgentinaNidera Handelscompagnie Trader ArgentinaAceitera General Deheza S.A. Major Producer ArgentinaGrupo Los Grobo Major Producer ArgentinaCampo El Tigre S.A Mid-sized producer ArgentinaControl Union Certificator ArgentinaEl Tejar Major Producer ArgentinaVirreyes Mid-sized producer ArgentinaGrupo Lacau Mid-sized producer ArgentinaSyngenta Input supplier BrazilSolidaridad Brazil NGO BrazilGrupo André Maggi Major producer BrazilAPDC Producer organization BrazilAliança da Terra Producer organization BrazilSchutter RTRS certification BrazilIcone Institute BrazilADM Trader BrazilIngbert Dovich / APDC Small Producer BrazilCargill Trader BrazilRabobank Bank BrazilWWF NGO BrazilABIOVE Industry association BrazilFMO Bank Netherlands /otherControl Union Certificator Netherlands /otherIFC Bank Netherlands /otherLandbouw Economisch Instituut Institute Netherlands /other© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.29


AppendixList of sources (2/3)List of literatureAuthor Title DateAapresid Principles and criteria for sustainable production. 2011Aapresid Presentation Albertengo 2009Berken, S. van et al. Towards sustainable soy an assessment of opportunities and risks for soybean production based on a case study Brazil nov-2008Bickel, U. et al. The Impacts of Soybean Cultivation on Brazilian Ecosystems 2003Dick et al., 1991 Continuous application of no-tillage to Ohio soils. 1991EMBRAPA Avaliação do desempenho econômico nov-2011EU Directive 2009/28/ECEU Directive on the promotion of the use of energy from renewable sources also known as Renweble Energy Directive(RED)2009Goldsmith, P. Soybean Production and Processing in Brazil 2008IBAMA Autos de infaҫao lavrados 2011ICONE Soy Strategic Gap Analysis: Brazil and Argentina jul-2011IFPRI The Case of Zero-Tillage Technology in Argentina nov-2009Informa Economics - FNP Analise do mercado de terras - Relatorio Bimestral N.º 44 Mercadodec-2011Instituto socIoambIental(Isa)Financiamento agroambiental no Brasil 2012ISCC ISCC 202-01 Checklist for theControl of Sustainability Requirements for the Production of Biomass v2.3eu mar-2011ISCC Certificación de los requisitos de sustentabilidad en diferentes áreas de uso de biomasa – ISCC Plus feb-2012Lantieri, M.J. et al. Work Practices, Exposure Assessment and Geographical Analysis of Pesticide Applicators in Argentina unpublishedLohr, L. et al. Farmer risk assessment for voluntary insecticide reduction 1999Meyer, D.E. et al. Pesticide use and glyphosateresistant weeds – a case study of Brazilian soybean production 2010MVO Factsheet soy aug-2011Pimentel, D. et al. Environmental and economic cost of pesticide use 1992Ribeiro, C.M. Evaluating soybean farming practices in Mato Grosso, Brazil: Economic and Environmental Perspectives. 2007RTRS RTRS Group and Multi-site Certification Standard Version 2.0_ENG mar-2011RTRS Argentinean National Interpretation of RTRS Standard for Responsible Soy Production V1.0_ENG may-2011RTRS Brazilian National Interpretation of RTRS Standard for Responsible Soy Production V1.0_ENG mar-2011RTRS Moving towards responsible soy - webinar apr-2011RTRS RTRS Accreditation and Certification Standard for responsible soy production Version 3.2_ENG mar-2011Sparovek, G. The Proposed Forest Law may-2011Sparovek, G. et al. Brazilian Agriculture and Environmental Legislation: Status and Future Challenges jul-2010continued on next page© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.30


AppendixList of sources (3/3)List of literature (continued)Author Title DateSparovek, G. et al.The revision of the Brazilian Forest Act: increased deforestation or a historic step towards balancing agriculturaldevelopment and nature conservation?2012Teasdale, J. et al. Potential Long-Term Benefits of No-Tillage and Organic Cropping Systems for Grain Production and Soil Improvement 2007USDA Sustainability in EU commodity markets jan-2012USDA Domestic support for Brazilian agriculture on the rise may-2005WWF Profitability and Sustainability in Palm Oil Production apr-2012List of datasetsOrganizationCompanhia Nacional de Abastecimento (CONAB)Instituto Brasileiro de Geografia e Estatística (IBGE)ISCCOilworldType of informationProduction cost dataLabour cost dataData on certified producersProduction and trade data© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.31


AppendixModel tree RTRS certification - extendedReturning cost (ICS, labor, equipment etc.)Amount of investment ($)+/+Costs of certification(cost/farm)System cost (RTRS fees, audits)Depreciation period+Impact of RTRS one-off investments∆ Unproductive acreage (ha)XImpact of Law one-off investmentsInterest rate (%)Producer-level cost andbenefits of transition toRTRS(cost/farm)+Cost of compliance withnational law(cost/farm)+Revenue - Input cost ($*mt)Interest /lease cost for compensatory land ($)X+Farm size (ha)∆ Gross margin ($)XAPP area size (%)-Benefits of compliancewith law/ RTRS(cost/farm)Avoided non-compliance cost ($)Yield of forest land ($/ha)+XYields from forest ownership ($)∆ Unproductive acreage LR (ha)* ∆ Unproductive acreage= LR required unproductive acreage (timeline as agreed with government) – Current productive acreage (t)© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.32


AppendixInternal control system costs (1/2)ICSCost of ICS per month Comments■ Provided is an overview of the costsof internal control systems providedthrough the interview program.■■Due to a tendency for interviewprograms to result in overestimate ofadministrative burden, we have takena conservative approach to modelingICS.In our model, we have assumed thatthe number of FTE required for ICSdeclines over time, as this function willbe integrated into daily business.(a) (a) (a) (a)(a)Internal audit(a)(a) Note: (a) Wage level not providedby interviewee but taken fromalternative source based onindicatedjob grade© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.33


AppendixInternal control system costs (2/2)Cost of ICS per month Comments■ Provided is an overview of the costsOverview of ICS / internal audit costs BrazilICSInterv 1 Interv 2 Interv 3 Interv 4 Average Currently usedFTE 2,5 1,3 0,6 0,1 1,1 1,3Job grade Administrator Agronomist Administrator ManagerWage cost (full-cost) 2200 (a) 3080 (a) 2200 (a) 5000 (a) 3.120 1.181$ / month 5.500 3.850 1.283 438 2.768 1.477Internal auditFTE 0,3 0,3 0,3Job gradeTechnician (a)Wage cost (full-cost) 3.080 3.080 1.277$ / month 770 770 319■of internal control systems collectedfrom various interviewiees through theinterview program.Due to expected bias, we have takena conservative estimate Moreover,interviewees indicate ICS cost arelikely to reduce over time. The figuresused in the model are given under‘currently used’.Overview of ICS / internal audit costs ArgentinaInterv 1 Interv 2 Interv 3 Interv 4 Interv 5 Average Currently usedICSFTE 1,0 1,0 1,0 2,5 0,1 1,2 1,0Job grade Administrator Administrator Administrator Administrator ControllerWage cost (full-cost) 1.000 1.200 1.000 (a) 1.000 3.520 1.680 1.000$ / month 1.000 1.200 1.000 2.500 352 1.263 1.000Internal auditFTE 1,0 0,2 0,8 0,7 0,3Job grade Tech agron Tech agron ManagerWage cost (full-cost) 1.750 1.750 4.000 2.500 1.500$ / month 1.750 350 3.000 1.700 375Note:(a) Wage level not providedby interviewee but taken fromalternative source based onindicatedjob grade© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.34


# of expertsAppendixModel effects of Good Agricultural Practices (1)Expert opinions on the cost-benefits of RTRS-required Good Agricultural PracticesComments6543210N=8Pesticide Fertilizer Labor Yield Indirect effects(e.g. health)GAP interventions required by RTRSCost- benefitNet costNeutralNet benefit■■■A number of RTRS requirements are related toGAP (RTRS 5.3, RTRS Standard forResponsible Soy Production Version 1.0) andsome are additional to national law.Interview feedback on GAP (8 experts wereinterviewed) was strongly divergent .The generalline is that farmers of 2.500+ Ha already applygood agricultural practices such as efficientpesticide use, as it makes business sense,and/or that farmers do not take a long-term viewdue to short-term leases.If the values for the five cost-benefit levers ofGAP (denoted here as pesticide, fertilizer, labor,yield andindirect effects’) are changed, thebusiness case changes.PesticideFertilizerLaborYieldIndirecteffectsApplying ICM techniques. Avoidance of moretoxic pesticide and use of ‘biological controlagents’. (RTRS 5.4-9)Perennial crops may serve as alternativefertilizer (RTRS 5.3)RTRS compliant no-tillage includes plantingperennial crops and ploughing techniques.(RTRS 5.3)Yields are affected by crop rotation programs,soil- and water quality maintainance. (RTRS5.3)Health benefits for workers.Benefit: One source in Argentina indicates farmers can save up to USD 9 per ha each year by applying IPMtechniques (reducing the frequency of pesticide applications from 5 to 2). This estimate seems to be too high. Nodata was available on the yield effect of increased pest pressure.Cost: Higher pesticide costs for killing perennial crop. Benefit: Reducing amount of fertilizer required. A study byTeasdale et al. (2007) reported no change in yields resulting from the application of a cover crop. Because of the longtime horizon of fertilization effects, these can hardly be attributed to RTRS.Cost: Planting perennial crops and more labour intensive ploughing and weeding techniques. Maintenance of riparianarea.Cost-benefit: A crop rotation program can reduce financial yields, while yields per hectare can be increased (Dick etal., 1991) A source in Argentina indicated 15% higher per/ha yields of soy in rotation with sorghum (presentationAlbertengo, Aapresid 2009) . No data on profit reduction from rotating with less profitable crop is given.Cost: Protective equipment. Benefit: Lower health costs for workers, see next slide for a hypothetical example.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.35


AppendixModel effects of Good Agricultural Practices (2)GAP benefits of better pesticide usage (direct and indirect effects)CommentsCalculation exampleSocietal health costs of pesticide usageTotal acute health effects of pesticide usage 79.5 US$ mln/year (Pimentel, 1992)Total USA expenses on pesticide USA in 1992 4,400 US$ mln/year (Pimentel, 1992)Total Brazil expenses on pesticide in 2004 7,125 US$ mln/year (Meyer, 2010)Estimate of total acute health effects of pesticide usage in Brazil 138 US$ mln/year (calculation)Health costs of soybean pesticide usage in Brazil 2.56 US$ /ha (calculation)Pesticide related health cost for a medium size farmer in Brazil 6,390 US$ /farm (calculation)Health benefits (assumption 5% of cost) * 319 US$ / farm (calculation)Reduction of pesticide expensesTotal expenditure on pesticide per ha soybean 255 BRL/ha/year (CONAB 07-11)Reduction on pesticide expenses (1 % of total cost) ** 3,315 USD / farm (estimate)■■■■The example calculated here shows acalculation example of how an indirect effectof Good Agricultural Practice can beattributed to farmers based on a scientificpublications. This calculation example basedon a number of assumptions requires morecontext based evidence.Indirect effect of IPM: Reduced health costfor workers. Experts agree that reducedexposure of workers to toxic agrochemicalsreduces societal cost of health.This example shows how the business casefor certification changes, if the values for oneof the five cost-benefit levers of GAP arechanged.To further detail the benefits of RTRS, acomprehensive temporal study on the costbenefitsof applying GAP in accordance withRTRS criteria is needed.Health benefits 319 USD / farm (calculation)Reduction on pesticide expenses 3,315 USD / farm (estimate)Total economic benefit 3,634 USD / farm/yearAssumptions:45% of all pesticide used in Brazil are used for soybean production (Pimentel; 2010)total soybean production in Brazil 2011/2012 is about 23.3 mln ha (Oilworld, 2011)soybeanfarmers in selected region of Brazil spend on average BRL 255 /ha/year on pesticide (CONAB 07-11)the currency rate BRL/USD is 0.52* assumption: health costs are assumed to be 5% lower after IPM implementation RTRS certification** assumption: according to an interviewee farmers can save USD 3 per ha by reducing # of spraying occassions, we assume farmerswill use 19% more pesticde on other spraying doses.Based onhypthetical costsavingswhichrequire moreresearch© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.36


AppendixKey assumptions regarding RTRS costs and benefitsItem Value Brazil Value Argentina Key assumptionsCostsManagementinformationsystem(set-up costs)Far from cert$6.116Close to cert$5.796Far from cert$8.989Close to cert$8.989Includes professional services / implementator to set up the management system and training of workers / contractors.Managementinformationsystem(maintenance)Far from cert1,25 FTE initially0,15 FTE after 4 yearsClose to cert0,6 FTE initially0,15 FTE after 4 yearsWage cost$1.181 / monthFar from cert1 FTE initially0,15 FTE after 4yearsClose to cert0,6 FTE initially0,15 FTE after 4yearsWage cost$1.000 / monthDedicated staff is required to generate the documentation for RTRS complianceThis requirement of dedicated staff reduces over time as information management become part of daily business routineFor ‘close to certification’, the initial FTE requirement is assumed to be 50% as a (partial) information management system willalready be in place.A somewhat lower FTE is required in Argentina as contractors provide some of the required records to the producerWage costs are ‘full cost’, including benefits, insurance, etc.InternalauditorFar from cert0,25 FTE initially0,1 FTE after 4 yearsClose to cert0,13 FTE initially0,1 FTE after 4 yearsWage cost$1.277FTEsSame as BrazilWage cost:$1.500Staff time at technical agronomist / supervisor level is required to do internal audits, checking that field records are doneaccurately, agro-chemical application conforms to regulations, working hour registration is correct, etc.The requirement for dedicated staff reduces over time as internal audit becomes more fully integrated into daily businesspractices.The FTE requirement for ‘close to certification’ is assumed to be 50%Wage costs are ‘full cost’, including benefits, insurance, etc.Audit Pre-audit: $3.557Audit: $5.928Surveillance audit:$3.557Pre-audit: $3.380Audit: $4.112Surveillance audit:$3.240Pre-audit is done as most respondents indicated they did one.Yearly surveillance audits are done.The re-certification audit costs the same as the main audit and is done in every third year after certification.Fee €0,30 / MT €0,30 / MT It is assumed that all RTRS certified soy is sold as RTRS and hence incurs the variable fee.Communityrelations$3.500 / year3 years$3.500 / year3 yearsThese costs cover activities like upgrading the website to make it more informative for the farm’s neighbors, organizing activitiesto inform neighbors about the farm’s activities and informing emergency services.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.37


AppendixKey assumptions regarding law compliance* costs and benefitsItem Value Brazil Value Argentina Key assumptionsCostsLegal Reserve26% LR deficit*(Cerrado)Cost of land $502 / ha(based on FNP)Environmentalregistration: $23 / haLegal advisory: $960N/ALegal Reserve can be compensated by purchasing additional land. Based on literature (Sparovek 2010, 2011) we presumefarmers far from certification are already 9% compliant in the Cerrado area, where 35% LR is required. Hence LR deficit is set at26%. The costs of LR are included in the model as the interest rate on land purchase cost, assuming 5-year linearly phasedcompliance with the LR requirement.No legal reserve (or similar) costs are assumed in Argentina as most producers in the Zona Nucleo are in areas designated bythe government as ‘green zones’, where there are no forrest reserve requirements.APP 3% * N/A An APP deficit of 3% is assumed for farmers far from certification. We assume APP set-aside contributes to compliance withLR. For APP, compliance costs were modelled from the first year of certification onwards. APP compliance cost are the cost ofreforrestation. Additionally, productive acreage of an APP compliant farmer is lower, which implies a lower gross margin. Thecosts of reforrestation are depreciated over 10 year.Complyingwith labourlawFar from cert$25 / haClose to cert$0 / haFar from cert$16 / haClose to cert$4 / haFor Brazil we assume a 50% increase in labour costs for producers that are not compliant with labour laws (far fromcertification). This increase stems mainly from the switch from unofficial to official labour such that full taxes and insurance needto be included.For Argentina complying with labour laws mainly involves switching from contractors that do not adhere strictly to the law toones that do. Interview feedback shuggests that this may involve a premium of 10%-15%, which results in an additional cost ofabout $16 / Ha (one-fourth of this is assumed for ‘close to certification’).This also covers non-wage aspects such as adequatetraining and health and safety procedures.Complyingwithagrochemicalregulations(incl wastemanagement)Far from cert -InfrastructureinvestmentsTriple wash: $1.100 peryear (10 yrs)Waste storage: $2.200per year (10 yrs)Gastank: $825 per year(10 yrs)Close to certGastank: $825 per year(10 yrs)Far from cert -Contractor costsAgrochemicalstorage:$2.500 per yearIn Brazil, the key costs for complying with agro-chemical regulations relate to investments in infrastructure, including storagefacilities for agrochemicals, triple-wash facilities, and storage facilities for agrochemical waste. These are assumed to bedepreciated over their economic lifetime. Interest costs are modeled additionally.In Argentina infrastructure requirements are covered by employing high-quality contractors (see previous item). Agrochemicalstorage can be outsourced at $1/ha.Complying with the Stockholm/Rotterdam conventions may incur additional costs from switching to non-banned alternatives thatare more expensive. The net cost-benefit of alternatives depends on many factors, including whether multiple application isrequired (alternatives have a longer residual effect). The incremental cost is assumed at $6.25 / ha* Assumptions on Forest Law are based on knowledge available to date on 15-5-2012.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.38


AppendixKey assumptions regarding law compliance costs and benefitsItem Value Brazil Value Argentina Key assumptionsCosts (continued)ComplyingwithStockholm/RotterdamconventionsFar from cert$2,70 / haFeedback in Argentina suggested that many producers still use chemicals that are banned, such as Endosulfan. Switching toan alternative incurs costs (more expensive products) and benefits (longer residual effect) depending on the number ofapplications.Feedback in Brazil suggested this is not an issue.SeedsFar from cert$6,25 / haThe law requires royalties to be paid if the producer has a contract with the seed developer.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.39


AppendixKey assumptions regarding law compliance costs and benefitsItem Value Brazil Value Argentina Key assumptionsBenefitsRevenue fromforrested landFar from cert$15,40 / HaN/AProducers are allowed to harvest trees on the non-LR part of the land that they buy in order to compensate for their LegalReserve requirement.Avoided noncompliancecosts$8.250 / year N/A Avoided fines as a result of compliance with national law, including conservation and labour laws. Modeled based on interviewresponses. Estimates of the change of being fined in case of non compliance and the actual penalty involved differ per region.We have not found reliable data on non-complinace costs in literature or databases.Premium €1.50 A premium of €1.50 is assumed (after chain of custody costs) ; this is a realistic assumption considering that other crops, likeRSPO certified palm-oil, have shown consistent levels of premium. Moreover, interviews indicate the premium on REDcompliant biodiesel ranges between USD 20-45, leaving discretion for a producer level premium. In the current study, only thepremium on meal is considered.Input discount 1,2% A discount on inputs was considered a reasonable assumption for small to medium size producers. Based on a case study, weassume this discount 1) could apply to RTRS certified producers, 2) 75% of a producer’s input products is covered by thediscount and 3) that in 20% of the cases where the discount is available, a more competitive product is available despite thediscount.Financediscount50bpA study indicates credit lines are available to all types of producers for investments in:1. becoming law compliant2. producing more sustainably (Instituto SocioAmbiental, 2011)Interest rates for credit lines can be as low as 1%. In addition, international finance providers and local banks provide discountsfor sustainable producers in selected cases. As discount of 50bp is assumed and applied to working capital financing.GAP NA Quantitative evidence unclear and case-dependent. See Appendix for an exploration on modeling GAP.© 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International.40


ContactBernd HendriksenKPMG SustainabilityDirector & Practice LeaderTel. +31 20 656 4500hendriksen.bernd@kpmg.nlJerwin TholenKPMG SustainabilityAssociate DirectorTel. +31 20 6564500tholen.jerwin@kmpg.nl


© 2012 KPMG Advisory N.V., registered with the trade register inthe Netherlands under number 33263682, is a subsidiary ofKPMG Europe LLP and a member firm of the KPMG network ofindependent member firms affiliated with KPMG InternationalCooperative (‘KPMG International’), a Swiss entity. All rightsreserved. Printed in the Netherlands.The KPMG name, logo and ‘cutting through complexity’ areregistered trademarks of KPMG International.This Report is exclusively drawn up for the purpose of acost/benefit analysis of the certification of Brazilian/Argentineansoybean producers commissioned by the Stichting IDHSustainable Trade Initiative (IDH) and for no other purposes.KPMG Advisory N.V. ("KPMG") does not guarantee or declarethat the information in the Report is suited for the objectives ofothers than IDH. This means that our Report cannot replace otherinvestigations and/or procedures that others than IDH may (orshould) initiate with the objective to obtain adequate informationabout matters that are of interest to them. It is not theresponsibility of KPMG to provide information to any third partythat has become known or available at any time after the date ofthe Report.KPMG accepts no liability for the Report towards any others thanIDH. The terms and conditions of the agreement under which thisReport has been drawn up are exclusively governed by Dutchlaw, and the court in the district within which the office is situatedhas exclusive jurisdiction with respect to any disputes arisingunder or in connection with that agreement.

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