KPMG: Responsible Soy; cost analysis of RTRS certification in Brazil and Argentina

Responsible Soy Cost / benefit analysis of RTRS certification in Argentina and Brazil

Final report 25 June 2012

kpmg.nl

The study on ‘Responsible Soy’ was commissioned by:

KPMG Advisory N.V. P.O. Box 74500 1070 DB Amsterdam The Netherlands

Laan van Langerhuize 1 1186 DS Amstelveen The Netherlands Tel: +31 (0)20 656 4500

Objective of this report This report aims to address the business case of responsible soy for producers. It discusses the methodology, input and output of the model per type of producer.

Note to the reader In partnership with:

To the reader, You are reading a report of a study commissioned by the Sustainable Trade Initiative.

We appreciate the opportunity to have assisted IDH and its partners in conducting the Responsible Soy study. Our special gratitude goes to the RTRS secretariat, ICONE and Solidaridad, for their important contributions.

Structure of this report The report will first clarify model design, reviewing producer types and explaining the cash flow model via a model tree. The subsequent section shows the costs and benefits for archetypal producers in Argentina/Brazil and provides a business case analysis for each, given a selection of realistic input variables. At the end of this section, a number of additional funding options are discussed and a distribution of costs over several cost buckets is presented in a dashboard for all producer types. In the last section, we will present a sensitivity analysis of key levers that could support adaptation of the industry to the RTRS-standard and explore the question why a segmented approach could benefit RTRS. We conclude with some recommendations to improve the RTRS business case.

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 of independent member firms affiliated with KPMG International Cooperative („KPMG International‟), a Swiss entity.

All our services are subject to our general conditions, which are filed at the Amsterdam District Court under number 36/2010, and which we will send to you on request.

This Report is exclusively drawn up for the purpose of a cost/benefit analysis of the certification of Brazilian/Argentinean soybean producers commissioned by the Stichting IDH Sustainable Trade Initiative (IDH) and for no other purposes. KPMG Advisory N.V. ("KPMG") does not guarantee or declare that the information in the Report is suited for the objectives of others than IDH. This means that our Report cannot replace other investigations and/or procedures that others than IDH may (or should) initiate with the objective to obtain adequate information about matters that are of interest to them. It is not the responsibility of KPMG to provide information to any third party that has become known or available at any time after the date of the Report.

KPMG accepts no liability for the Report towards any others than IDH. The terms and conditions of the agreement under which this Report has been drawn up are exclusively governed by Dutch law, and the court in the district within which the office is situated has exclusive jurisdiction with respect to any disputes arising under or in connection with that agreement.

The reader should be aware of the limited period of time covered since RTRS soy has been in the market. Hence, the developed model is based on one year of experience only, with datapoints gathered mainly through an interview programme undertaken in Feb-May of 2012. It should be further noted that this study is based on a modeling exercise, which is necessarily a simplified version of reality. This study does not claim statistical representativeness. It is important to develop a more elaborate data set in the coming years.

Yours sincerely, KPMG Advisory N.V. Bernd Hendriksen Director

Executive summary (1/2)

RTRS plays a key role in driving discussions surrounding the sustainable production of soy  In Brazil and Argentina, there is a gradual convergence towards compliance with national law and sustainable production standards, driven by a combination

of stronger enforcement and societal expectations, with the latter being in part influenced by initiatives such as RTRS.  Particularly for leading producers, RTRS provides a platform and a common language for implementing their sustainability objectives.

RTRS certification can provide various benefits for soy producers that comply with national law and guidelines for good agricultural practices  Key areas of national law compliance relate to sustainable land-use, biodiversity preservation, and good working conditions.  The costs of national compliance vary strongly between the regions studied in Brazil and Argentina due to the costs in Brazil of reforestation and buying land

to comply with Legal Reserve requirements.  The focus areas of this study are Mato Grosso in Brazil and the Zona Nucleo in Argentina.

Key potential benefits that have been identified are a price premium, input discounts, a discount on financing, and the effects of good agricultural practices  The most important benefit for producers is a healthy price premium, for which the market is currently in the process of establishing the appropriate level.  Due to the recent establishment of the RTRS scheme, producers and consumers do not always find each other, with the risk that producers do not get

a premium on all their RTRS soy yet.  Input and financing discounts are benefits for which precedents exist, as well as a commitment in the sector to providing such benefits.  The level of benefits modeled in this study is based on case studies observed in the sector rather than the consistent existence of these benefits.  Good agricultural practices can provide significant benefits in the form of increased productivity, reduced healthcare costs, reduced input costs, etc, however

this particularly applies to very small producers (<500 Ha) that have not achieved optimal levels of productivity. The producer group of small farmers was not covered by this study.

The key costs of RTRS certification relate to setting up internal control systems in order to demonstrate compliance, external audits and RTRS fees  Producers have to make significant investments in establishing adequate internal controls in order to monitor a range of KPIs, including input application,

working conditions and biodiversity management.  The costs of ICS are expected to go down over time as the requirements become better understood and best practices (learning curve) spread in the sector.  A rigorous information management system also has benefits in terms of potential improvements in operational efficiency, although this is hard to quantify.  Costs associated with national law compliance are not included in the business case as they cannot be strictly attributed to RTRS certification.

© 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 of independent 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.

2

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 that appear 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 every

ton 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 of

investments 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 more

with 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 for

internal 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 of independent 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 Contents

1. Model design

6

2. Model outcomes - Producer perspective

12

3. Summary of recommendations and next steps

24

4. 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 of independent 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

1. Model design

Model design

The model is built up of a producer P&L for each year, with a time horizon of 7 years Model set-up

Archetypal producers

Incremental producer P&L Cost

Benefit

Comments

Output tables per producer

Select which costs to include in business case/ attribute to RTRS

Dashboard

■ We have built a model in which the effect of RTRS on the producer P&L is visualized. The model could run a range of scenarios showing the effect of interventions on different producer types.

■ This section on model design shows archetypal producers, an overview of the costs and benefits and a model tree, with the subsequent section shows the results of the modelling exercise.

■ The costs and benefits are modeled over time, with a horizon of 7 years, reflecting the investment horizon of soy producers.

■ A dashboard has been built for IDH that provides insight into:

Interventions to optimize business case Please mind the following: ■ The output of our research is captured in a model, which is always a simplified version of reality.

Z

■ This model is a first version. In the coming years, the knowledge base will be further build up in order to enhance the model.

Scenario’s

A)

The categories of costs where investments in the promotion of RTRS will be allocated to.

B)

Which type of producer has the lowest costs / ton RTRS Soy.

■ In our model, the difference between RTRS and compliance to National Law is crucial. A split has been made between costs and benefits to be attributed to each of these, in order to present a pure RTRS business case (see p. 8-9) ■ Next to that, the report illustrates the qualitative benefits, even when these cannot be modeled.

© 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 of independent 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.

6

Model design

Model Input: Archetypal producers Overview of selected producer types in Brazil

Brazil

Identified producer groups Assumed level of RTRS compliance Region in which this producer type is assumed to be found

Comments

Argentina

Close to certification, medium size

Far from certification, medium size

Major producers

Close to certification, medium size

Far from certification, medium size

High

Low

Variable

High

Low

Southern Mato Grosso Goias, Minais Gerais, MS

Northern Mato Grosso MAPITOBA

Mato Grosso MAPITOBA

Enterprise Self managed Self managed farming with Typical farm mgt. system farm by farm by business owner owner management

Zona Nucleo

Zona Nucleo

Leased farm on short-term leases (<3yr)

Leased farm on short-term leases (<3yr)

Type

Established farms (>20 years) in Cerrado area

Expansion farms situated recently (<20 years) in Cerrado area

Farms situated in established and expansion area

Established producers leasing land, using contractors

Established producers leasing land, using contractors

Compliant with Legal Reserve?

Yes

No

Yes

N/A

N/A

Average productive area soy (ha) 1

2.500 ha

■ On request of IDH we have focused our survey efforts on three producer groups in Brazil and two producer groups in Argentina, of which the ‘archetypal’ producer is described in this overview.

■ Interviewees found this segmentation into producer groups relevant and understandable.

■ For Brazil, we have assumed that major producers and producers close to certification are compliant with Legal Reserve, in other words, they do not need to buy or lease additional acreage of land to maintain their production.

■ Sector participants have argued that almost all of the costs identified should be attributed to Brazilian Law, with audit and internal control costs attributed to RTRS-certification.

Note:

2.500 ha

30.000 ha

2.500 ha

2.500 ha

© 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 of independent 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.

(1) The archetypal productive area is the average area used for soy production.

The total area under production may be larger due to crop rotation.

7

Model design

Key costs relating to RTRS Overview of costs

Item

National Law

Comments

RTRS

Modeled

Compliance with forest laws Cost of land purchase (interest cost) Cost of reforestation Legal & technical advice Registration environmental license Area of permanent protection (APP)

    

    

    

Compliance with labour laws Employee housing improvement Labour legislation (paying official wages) Protective equipment

  

  

  





Incl in RTRS business case

■ The model contains costs as well as benefits. This overview presents an overview of all costs included.

■ There is extensive overlap between national law and RTRS requirements, both in Brazil and Argentina.

■ RTRS-specific requirements relate mainly to record keeping, community relations and sustainable agricultural practices such as crop rotation.



Community relations Regulation (agro)chemicals, incl waste Storage facilities Triple washing facilities Waste storage unit Fuelling station

   

   

   

Complying with R'dam/Stockholm conventions







Buying seeds through official channels







Set-up ICS (incl. training workers/contractors) Training of workers Consultancy / ‘implementator’ Information management software

  

  

  

Maintaining management system Administrative support Internal audit

 

 

1 1

Audit costs







Variable RTRS fees (€0.3/Mt)







Logistics costs relating to mass balance requirements



N

Costs of introducing crop rotation



G

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 of independent 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.

 1

G N

Included Assumes that ‘Close to certification’ requires half of ‘Far from certification’ FTE due to management system already in place ‘Good agricultural practice’, see Appendix for more detail.

No substantive information available 8

Model design

Key benefits relating to RTRS Overview of benefits National Law

Item

Comments

RTRS

Modeled

Incl. in RTRS business case

Revenue from (re)forested land







Avoided non-compliance costs







Premium





S

Input discount





S

Financing discount





S

Efficiency due to well documented structure and procedures





N

Fit for the future (ability to adopt to new business standards)





N

Improved stakeholder engagement



N

Long-term productivity improvement



G



N



G

Land value increase



Reduction input use Cost reduction due to fewer accidents





G

Health benefit from prudent agrochemical use





G

Reduction in legal costs from agrochemical contamination





N

Access to better lands for lease



N

Access to European markets now or in the near future



N

Key 

Included

S

Included in business case calculation as a possible scenario

G

‘Good agricultural practice’, see Appendix for more detail.

N

No substantive information available

© 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 of independent 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.

■ There are many potential benefits of RTRS mentioned by producers and others during our study.

■ ‘First movers’ mention the advantages of having a better company today and tomorrow (well documented structure and procedures), getting a psychological boost from receiving the certificate and having a better relationship with different stakeholders. Some of the producers also believe that standards like RTRS will become business as usual within 510 years.

■ The data points received on these and other benefits (N and G in table) during the interviews are, however, not consistent, or little quantitative evidence was found. And some benefits cannot be attributed to RTRS but are a result of National law compliance.

■ Therefore, the benefits of RTRS we have used in our model are premium, input discount, and financing discount.

■ The beneficial effects of ‘good agricultural practice’ have not been modeled as opinions and evidence on this are strongly divergent. However, it seems that there exists a possibility that yield and/or cost savings effects can be significant and contribute to the business case, particularly for smaller producers (<500 Ha).

9

Model design

Model tree RTRS certification Model tree

Comments

Returning cost (ICS, equipment, labor etc.) + +

Costs of certification (cost/farm)

System cost (RTRS fees, audits) + Impact of RTRS one-off investments

■ The transition costs as well as benefits, for producers moving to RTRS are described in this tree. A more elaborate version can be found in the Appendix.

■ It was not possible to include the potential cost-benefits of Good Agricultural Practices (GAP) in the model analysis. These are illustrated in the Appendix.

Impact of National Law one-off investments Producer-level cost and benefits of transition to RTRS (cost/farm)

+

Cost of compliance with national law (cost/farm)

+ Interest /lease cost for compensatory land ($) + ∆ Gross margin ($)

Avoided non-compliance cost ($) + -

Benefits of compliance with 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 of independent 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 outcome

Key assumptions regarding RTRS benefits Overview of assumptions

Item Premium

Value Brazil/Argentina €1.50

Key assumptions A premium of €1.50 per MT of certified beans is assumed 1 ; this is a realistic assumption considering the average RTRS premium (on meal/oil) was USD 4,25 in 2011. We also find support in the fact that other crops, like RSPO certified palm-oil, have shown consistent levels of premium. Moreover, interviews indicate the premium on RED2 compliant biodiesel ranges between USD 20-45 per ton of biodiesel, leaving discretion for a producer level premium (our consultations show this could translate in a premium of about USD 3,60 per MT beans). In the current study, only the premium on meal is considered.

Input discount

1,2%

A discount on inputs3 was considered a reasonable assumption for small to medium size producers. Based on a case study4 , we assume this discount 1) could apply to RTRS certified producers, 2) 75% of a producer’s input products is covered by the discount and 3) that in 20% of the cases where the discount is available, a more competitive product is available despite the discount.

Finance discount

50bp

A study indicates credit lines are available to all types of producers for investments in: 1. becoming law compliant 2. producing more sustainably Interest rates for credit lines can be as low as 1%.(Instituto SocioAmbiental, 2011) In addition, international finance providers and local banks provide discounts for sustainable producers in selected cases. A discount of 50bp is assumed and applied to working capital financing.

GAP

NA

Quantitative evidence is unclear and case-dependent. See Appendix for an exploration on modelling 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 of independent 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.

Comments ■ Key benefits hat are modelled are premium, input discount and financing discount. The basic assumptions are described on this page.

■ For a more detailed specification of other assumptions, including costs, as depicted on the next page, see the final pages of the report in the Appendix.

Notes: 1. It is assumed that the RTRS certified producer is able to sell all soy at this premium. The premium is applied for 7 years, after which it is expected to become internalised in the soy price as RTRS soy becomes universal. Interview feedback suggests that some producers are currently unable to sell all their RTRS soy at a premium, which would have an adverse impact on the business case.

2. EU Renewable Energy Directive (RED) requiring carbon disclosure of biofuels (EU Directive 2009/28/EC) 3. Fertilizer, pesticide, herbicide, fungicide 4. This value is based on a study of a producer organisation, which has negotiated a discount of 2% with an input provider conditional upon adopting its certification scheme (i.e. Agriculture Certificada, Aapresid, Argentina) 5. Of the surveyed farmers, 70% indicated to be unaware of these credit lines. (Instituto SocioAmbiental, 2011) 12

Model outcome

Cost overview Argentina

Overview of costs / benefits for a producer far from certification in Argentina (US$ / MT, average for 7 years) Cost of legal compliance 1

Benefits legal compliance

Costs of RTRS

Benefits of RTRS

Comments ■ The graph shows the costs and benefits of certification for an Argentinean producer far from certification.

■ In Argentina, most producers in the Zona Nucleo, where >80% of soy is farmed, are situated in areas designated by the government as ‘Green’, which require no conservation measures.

■ The staff time required to maintain the management information system and to conduct internal audits is assumed to decrease over time as these procedures become increasingly integrated in daily business routine.

■ National law compliance costs relate mainly to compliance with labour legislation in the area of paying official wages and health & safety, which may require shifting to higher quality contractors.

■ The business case on page 14 onwards focuses strictly on RTRS-related costs and benefits.

Producer: Far from cert Size: 2.500 ha Premium: €1,50 for 7 years Input discount: 1,2% Finance discount: 50bp First campaign as RTRS: Year 1 Note:

(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 of independent 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 outcome

Cost overview Brazil

Overview of costs / benefits for a producer far from certification in Brazil (US$ / MT, average for 7 years) Cost of legal compliance 1

Benefits legal compliance

Costs of RTRS

Benefits of RTRS

Comments ■ The graph shows the costs and benefits of certification for a Brazilian producer far from certification.

■ Brazilian soy producers, which can be located in sensitive ecological areas, are faced with legislation relating to forest conservation.

■ A large part of costs relating to national compliance relate to the ‘Legal Reserve’ (LR) required by the Forest Code and to Permanent Protection Areas (APP).

Literature study indicates an LR deficit in Mato Grosso of 11-26% and an APP deficit in range of 3-5% (Sparovek et al., 2010). We assume 26% for LR and a 3% APP deficit.* LR compliance results in costs for renting/buying forest land, while APP results in lower productive acreage and costs of reforestation.

■ It is assumed that producers are able to buy land in order to compensate for Legal Reserve requirements on productive land.

Producer: Far from cert Size: 2.500 ha Premium: €1,50 for 7 years Input discount: 1,2% Finance discount: 50bp First campaign as RTRS: Year 1 Note:

(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 of independent 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.

■ Benefits of national law compliance relate mainly to income from the harvesting of indigenous trees and the avoidance of fines.

■ The business case on the following pages focuses strictly on RTRS-related costs and benefits. * Assumptions on Forest Code are based on the available knowledge on 15-5-2012 , when the new Code was not yet finalised.

14

Model outcome

Business case for Argentinean medium size producer Cost-benefit analysis over time

Comments ■ A robust business case can be made for RTRS certification, although this is dependent on a combination of benefits, including a premium and discounts on inputs and financing.

Average cumulative cost-benefit to date (USD / MT)

Producer: Far from cert Size: 2.500 ha Premium / price internalisation: €1,50 for 7 yrs Input discount: 1,2% Finance discount: 50bp First campaign as RTRS: 2012

Volume produced Volume RTRS Impact of RTRS cost Cost impact RTRS as % of total operational costs Impact of RTRS benefits (incl. EUR 1,5 premium) RTRS Cost minus benefit Average cumulative cost-benefit to date

■ Compared to Brazil, the staff time required for the information management system will be somewhat lower in Argentina as a lot of the required data is provided by the contractors. Further detail about interviewees’ indications on staff time required can be found in the Appendix.

■ Costs related to national law compliance are not included in this business case.

■ After 7 years, this producer will have had a net benefit of US$1,22 on every ton sold in those 7 years.

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

7.500 0 (7.586)

7.500 7.500 (28.527)

7.500 7.500 (21.949)

7.500 7.500 (17.649)

7.500 7.500 (14.221)

7.500 7.500 (9.849)

7.500 7.500 (9.849)

7.500 7.500 (10.721)

0,3%

1,1%

0,9%

0,7%

0,5%

0,4%

0,4%

0,4%

-

27.396

27.396

27.396

27.396

27.396

27.396

27.396

USD/farmer

(7.586) NA

(1.131) -1,16

5.447 -0,22

9.747 0,29

13.175 0,66

17.547 0,99

17.547 1,22

16.675 1,36

USD/farmer USD/MT

MT MT USD/farmer

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 of independent 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 outcome

Business case for Argentinean medium size producer Cost-benefit analysis over time

Comments ■ Producers in Argentina which are close to certification are already compliant with national laws regarding labor circumstances, minimum wages and agrochemical usage.

Average cumulative cost-benefit to date (USD / MT)

Producer: Close to cert Size: 2.500 ha Premium / price internalisation: €1,50 for 7 yrs Input discount: 1,2% Finance discount: 50bp First campaign as RTRS: 2012

Volume produced Volume RTRS Impact of RTRS cost Cost impact RTRS as % of total operational costs Impact of RTRS benefits (incl. EUR 1,5 premium) RTRS Cost minus benefit Average cumulative cost-benefit to date

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

7.500

7.500

7.500

7.500

7.500

7.500

7.500

7.500

0 (7.586)

7.500 (20.277)

7.500 (16.449)

7.500 (14.899)

7.500 (14.221)

7.500 (9.849)

7.500 (9.849)

7.500 (10.721)

0,3%

0,8%

0,7%

0,6%

0,6%

0,4%

0,4%

0,4%

-

28.911

28.911

28.911

28.911

28.911

28.911

28.911

USD/farmer

(7.586) NA

8.634 0,14

12.462 0,90

14.012 1,22

14.690 1,41

19.062 1,63

19.062 1,79

18.190 1,88

USD/farmer USD/MT

■ A law compliant producer in Argentina benefits more from certification than a non-law compliant producer.

■ After 7 years, this producer will have had a net benefit of US$1,79 on every ton sold in those 7 years, suggesting there would be a business case even if the benefits were lower.

MT MT USD/farmer

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 of independent 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 outcome

Business case for Brazilian major producer Cost-benefit analysis over time

Comments ■ For major producers in Brazil there is a strong business case for RTRS certification.

Average cumulative cost-benefit to date (USD / MT)

■ Shown here is the business case for a major producer that already has a basic management information system in place.

■ Costs related to national law compliance are not included in this business case.

Producer: Major producer Size: 30.000 ha Premium / price internalisation: €1,50 for 7 yrs First campaign as RTRS: 2012

Volume produced Volume RTRS Impact of RTRS cost Cost impact RTRS as % of total operational costs Impact of RTRS benefits (incl. EUR 1,5 premium) RTRS Cost minus benefit Average cumulative cost-benefit to date

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

90.000

90.000

90.000

90.000

90.000

90.000

90.000

90.000

90.000 (99.080)

90.000 (105.364)

90.000 (80.364)

90.000 (80.364)

90.000 (91.364)

0 (17.384)

90.000 90.000 (167.347) (103.796)

■ The producer is assumed to receive € 1,50 in premium for 7 years.

Benefits from discounts on finance or input costs are not included.

■ After 7 years, this producer will have had a net benefit of US$0,73 on every ton sold in those 7 years, suggesting there would be a business case even if the benefits were lower.

MT MT USD/farmer

0,1%

0,9%

0,6%

0,6%

0,6%

0,4%

0,4%

0,5%

-

174.376

174.376

174.376

174.376

174.376

174.376

174.376

USD/farmer

(17.384) NA

7.029 -0,12

70.581 0,33

75.296 0,50

69.012 0,57

94.012 0,66

94.012 0,73

83.012 0,75

USD/farmer USD/MT

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 of independent 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 outcome

Business case for Brazilian medium size producer Cost-benefit analysis over time

Comments

Average cumulative cost-benefit to date (USD / MT)

■ In the context of a medium-sized producer close to certification in Brazil, the business case surpasses break-even in year 2.

■ After 7 years, this producer will have had a net benefit of US$1,51 on every ton sold in those 7 years.

Producer: Close to cert Size: 2.500 ha Premium / price internalisation: €1,50 for 7 yrs Input discount: 1,2% Finance discount: 50bp First campaign as RTRS: 2012

Volume produced Volume RTRS Impact of RTRS cost Cost impact RTRS as % of total operational costs Impact of RTRS benefits (incl. EUR 1,5 premium) RTRS Cost minus benefit Average cumulative cost-benefit to date

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

7.500 0 (4.195)

7.500 7.500 (25.532)

7.500 7.500 (19.137)

7.500 7.500 (16.766)

7.500 7.500 (16.766)

7.500 7.500 (10.895)

7.500 7.500 (10.895)

7.500 7.500 (13.266)

0,2%

1,1%

0,8%

0,7%

0,7%

0,5%

0,5%

0,6%

-

28.682

28.682

28.682

28.682

28.682

28.682

28.682

USD/farmer

(4.195) NA

3.150 -0,14

9.545 0,57

11.916 0,91

11.916 1,08

17.787 1,34

17.787 1,51

15.416 1,59

USD/farmer USD/MT

MT MT USD/farmer

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 of independent 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 outcome

Business case for Brazilian medium size producer Cost-benefit analysis over time

Comments

Average cumulative cost-benefit to date (USD / MT)

■ Shown here is the business case for a medium-sized producer that still has to take all the necessary steps to meet RTRS requirements, including setting up and maintaining a management information system.

Producer: Far from cert Size: 2.500 ha Premium / price internalisation: €1,50 for 7 yrs Input discount: 1,2% Finance discount: 50bp First campaign as RTRS: 2012

Volume produced Volume RTRS Impact of RTRS cost Cost impact RTRS as % of total operational costs Impact of RTRS benefits (incl. EUR 1,5 premium) RTRS Cost minus benefit Average cumulative cost-benefit to date

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

7.500 0 (4.514)

7.275 7.275 (36.226)

7.275 7.275 (26.241)

7.275 7.275 (20.280)

7.275 7.275 (16.690)

7.275 7.275 (10.818)

7.275 7.275 (10.818)

7.275 7.275 (13.190)

0,2%

1,4%

1,0%

0,8%

0,6%

0,4%

0,4%

0,5%

-

26.731

26.731

26.731

26.731

26.731

26.731

26.731

USD/farmer

(4.514) NA

(9.495) -1,93

490 -0,93

6.452 -0,32

10.042 0,10

15.913 0,52

15.913 0,80

13.542 0,95

USD/farmer USD/MT

■ After 7 years, this producer will have had a net benefit of US$0,80 on every ton sold in those 7 years.

MT MT USD/farmer

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 of independent 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 outcome

Additional funding options for Argentinean producer Cost-benefit analysis over time

Comments ■ Several funding sources are available to RTRS certified producers.

Average cumulative cost-benefit to date (USD / MT)

■ The blue line shows the effect of a premium, finance discount and input discount identical to the one described on the previous page.

■ The green line shows a scenario where early movers receive an additional 3 year benefit on RTRS through a ‘first mover fund’.

■ Producers could benefit from a premium on biodiesel (purple line). Pre-condition to receiving this premium is a better uptake of RTRS certified biodiesel.

■ The biodiesel premium matches the aftertax crusher premium received on certified biodiesel exported from Argentina. The level of USD 3,60 in biodiesel premium presumes 80% of premium is forwarded from crusher to farmer. Recognition of Chain of Custody requirements of standards that dominate the biofuel market could expand the window of opportunity to realize this premium.

Base case: Premium / price internalisation: €1,50 /Mt for 7 yrs Input discount: 1,2% Finance discount: 50bp

First mover funding: Premium / price internalisation: €1,50 for 7 yrs Input discount: 1,2% Finance discount: 50bp Early mover funding: USD 0,50/Mt (3yrs)

Biodiesel premium: Biodiesel premium: USD 3,60 /Mt of beans Input discount: 1,2% Finance discount: 50bp

© 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 of independent 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.

Country: Argentina Producer: Far from cert Size: 2.500 ha First campaign as RTRS: 2012

20

Model Outcome

Costs allocation per category of expenditure Cost-analysis – scenarios (US$ / MT, average for 7 years)

Comments ■ This graph shows total transitional investments per farmer. The cost figures includes costs for legal compliance and excludes benefits.

(including legal compliance)

Total cost / MT

Medium Close

Medium Far

■ As GAP benefits were not quantified, these do not appear in this overview.

Argentina

Brazil Major

Medium Close

Medium Far

Average level of benefit given a €1.50 premium, input discount and financing discount: $4,58

© 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 of independent 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.

Key

21

Model Outcome

Costs allocation per category of expenditure Cost-analysis – scenarios (US$ / MT, average for 7 years)

Comments ■ This graph shows how the costs shown on the previous slide are distributed over five categories identified by IDH.

Argentina

Brazil Medium Far

Major

Medium Close

Medium Far

Share of cost

Medium Close

■ When considering total costs that have to be made to reach RTRS compliance (including legal compliance costs), it is clear that the Legal Reserve requirement in Brazil takes a large share of costs.

■ If a business case exists for RTRS certification (requirements for ICS and system costs are met), additional funds invested contribute to biodiversity, labour and community relations.

■ The share of cost dashboard shows how money invested in different archetypal producers contributes to these 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 of independent 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 of recommendations and next steps

Recommendations

Building blocks to improve business case for RTRS certification Building blocks to improve the business case for responsible soy

Comments Demand drivers ■ Ensure more publicity on transactions to build trust in the prevalence of a RTRS premium.

■ Promote RTRS certification of biodiesel warehouses / refineries in Europe ■ Consider recognition chains of custody audited by other standards.

■ Communicate that €0.30 fee applies only to traded RTRS soy.

Benefits ■ Encourage better utilization of finance discount.

■ Combine certification with negotiatied input discount.

■ Promote RTRS as additional reward for companies that manger to reach legal compliance.

Benefits

Demand drivers

Marketing

Cost reduction

© 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 of independent 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.

Cost reduction ■ Collectively negotiated audit fees for smaller producers.

■ Free training for small producers.

■ Standardised management software.

■ Focus audit on outcomes rather than process.

Marketing ■ Better known RTRS could support negotiating lease contracts with landowners.

■ Better known RTRS could make perceived gap to implementation for producers smaller as they know what is expected.

■ Acknowledge existing producer standards as equivalent to RTRS.

24

Recommendations

Key levers for RTRS soy – reduce ICS, ensure premium and /or a reasonable input discount Overview of key levers for achieving ‘break-even’ for a producer far from certification in Brazil (1)

Original value

Break –even analysis Original cost/benefit Target cost/benefit

-$0,49 $0,00

Target Feasibility value to reach break even (2)

1,25 FTE

0,49 FTE

BRL 10.785

BRL 1.800

€0,30

-€0,08

€0,50

€0,88

1,2,%

1,47%

50 bp

119 bp

Producer: Far from cert Size: 2.500 ha Premium: €0,50 for 7 years Input discount: 1,2% Finance discount: 50bp First 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. © 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 of independent 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.

Comments ■ In this slide a number of levers are shown which could be used to improve the business case of RTRScertified soy on the producer level.

■ The ‘original value‘ is the value modelled for a medium size Brazilian archetypal Brazilian producer which is far from certification (except for premium which is lower). The ‘target value’ indicates how this value should be changed to reach break-even with a 7 year time horizon perspective, provided all other values remain unchanged.

■ The most promising levers to promote the RTRS business case appear to lie in ensuring a healthy premium level, and/or a reasonable input discount.

■ A further promising lever relates to reduced internal control (ICS) costs, which could be facilitated by the RTRS organization by developing a standardized information management system and/or spreading best practice.

Key:

Level of feasibility High Medium Low 25

Recommendations

RTRS segmentation Segmented approach

Comments ■ RTRS can be a good business case for producers but certain conditions need to be in place. To improve the business case we propose a segmented approach.

Large producers > 5.000 Ha

Medium producers 1.000 – 5.000 Ha

Small producers < 1.000 Ha

• • •

Access to market Sustainability credentials Premium

• • •

Premium Finance & input discounts Lease negotiation position

• • • •

Productivity improvement Facilitate standardised ICS Free RTRS training RTRS ‘light’ option

© 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 of independent 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.

■ The investment for smaller producers is currently too large as they cannot bear the administrative burden required for compliance, such that a more accessible version of RTRS may be developed especially for them.

■ Although costs for small producers are highest, their gains from applying Good Agricultural Practice could also be highest.

■ Medium producers would be susceptible to benefits like finance discounts, resolving legal compliance or input discounts.

■ Large producers’ certify under RTRS in order to ensure access to markets and fortify their sustainability credentials, while their biggest concern is the insecurity surrounding RTRS demand, the payment of premiums, and whether they would need to pay the RTRS fees up-front.

26

Appendix

Appendix

Glossary

Abbreviations AC APP bp BRL EUR Forest Code FTE GAP GMP ICM ICS IPM ISCC LR MAPITOBA MS MT P&L RED RSPO RTRS USD

Agricultural Certificada Permanent Preservation Area basis points Brazilian Real Euro Brazilian Law on the preservation of native vegetation Full time equivalent Good Agricultural Practice Good Manufacturing Practices Integrated Crop Management Internal Control System Integrated Pest Management International Sustainability & Carbon Certification Legal Reserve Maranhao, Piauí, Tocantins, Bahia Mato Grosso do Sul Metric Ton Profit and Loss Renewable Energy Directive or EU Directive 2009/28/EC Round Table for Sustainable Palm Oil Round Table for Responsible Soy US 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 of independent 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

Appendix

List of sources (1/3)

List of interviewees Interviewee Los Caldenes AAPRESID Solidaridad Argentina RTRS secretariat Nidera Handelscompagnie Aceitera General Deheza S.A. Grupo Los Grobo Campo El Tigre S.A Control Union El Tejar Virreyes Grupo Lacau Syngenta Solidaridad Brazil Grupo André Maggi APDC Aliança da Terra Schutter Icone ADM Ingbert Dovich / APDC Cargill Rabobank WWF ABIOVE FMO Control Union IFC Landbouw Economisch Instituut

Type of organization Mid-sized producer Soybean farmer organization – Farmer cooperation / mid-sized farmers NGO Scheme owner Trader Major Producer Major Producer Mid-sized producer Certificator Major Producer Mid-sized producer Mid-sized producer Input supplier NGO Major producer Producer organization Producer organization RTRS certification Institute Trader Small Producer Trader Bank NGO Industry association Bank Certificator Bank Institute

© 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 of independent 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.

Country Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Netherlands /other Netherlands /other Netherlands /other Netherlands /other

29

Appendix

List of sources (2/3)

List of literature Author Aapresid Aapresid Berken, S. van et al.

Bickel, U. et al.

Dick et al., 1991 EMBRAPA

Title Principles and criteria for sustainable production.

Presentation Albertengo Towards sustainable soy an assessment of opportunities and risks for soybean production based on a case study Brazil The Impacts of Soybean Cultivation on Brazilian Ecosystems Continuous application of no-tillage to Ohio soils.

Avaliação do desempenho econômico EU Directive on the promotion of the use of energy from renewable sources also known as Renweble Energy Directive EU Directive 2009/28/EC (RED) Goldsmith, P. Soybean Production and Processing in Brazil IBAMA Autos de infaҫao lavrados ICONE Soy Strategic Gap Analysis: Brazil and Argentina IFPRI The Case of Zero-Tillage Technology in Argentina Informa Economics - FNP Analise do mercado de terras - Relatorio Bimestral N.º 44 Mercado Instituto socIoambIental Financiamento agroambiental no Brasil (Isa) ISCC ISCC 202-01 Checklist for theControl of Sustainability Requirements for the Production of Biomass v2.3eu ISCC Certificación de los requisitos de sustentabilidad en diferentes áreas de uso de biomasa – ISCC Plus Lantieri, M.J. et al.

Work Practices, Exposure Assessment and Geographical Analysis of Pesticide Applicators in Argentina Lohr, L. et al.

Farmer risk assessment for voluntary insecticide reduction Meyer, D.E. et al.

Pesticide use and glyphosateresistant weeds – a case study of Brazilian soybean production MVO Factsheet soy Pimentel, D. et al.

Environmental and economic cost of pesticide use Ribeiro, C.M. Evaluating soybean farming practices in Mato Grosso, Brazil: Economic and Environmental Perspectives.

RTRS RTRS Group and Multi-site Certification Standard Version 2.0_ENG RTRS Argentinean National Interpretation of RTRS Standard for Responsible Soy Production V1.0_ENG RTRS Brazilian National Interpretation of RTRS Standard for Responsible Soy Production V1.0_ENG RTRS Moving towards responsible soy - webinar RTRS RTRS Accreditation and Certification Standard for responsible soy production Version 3.2_ENG Sparovek, G. The Proposed Forest Law Sparovek, G. et al.

Brazilian Agriculture and Environmental Legislation: Status and Future Challenges continued 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 of independent 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.

Date 2011 2009 nov-2008 2003 1991 nov-2011 2009 2008 2011 jul-2011 nov-2009 dec-2011 2012 mar-2011 feb-2012 unpublished 1999 2010 aug-2011 1992 2007 mar-2011 may-2011 mar-2011 apr-2011 mar-2011 may-2011 jul-2010

30

Appendix

List of sources (3/3)

List of literature (continued) Author Sparovek, G. et al.

Teasdale, J. et al.

USDA USDA WWF

Title The revision of the Brazilian Forest Act: increased deforestation or a historic step towards balancing agricultural development and nature conservation?

Potential Long-Term Benefits of No-Tillage and Organic Cropping Systems for Grain Production and Soil Improvement Sustainability in EU commodity markets Domestic support for Brazilian agriculture on the rise Profitability and Sustainability in Palm Oil Production

Date 2012 2007 jan-2012 may-2005 apr-2012

List of datasets Organization Companhia Nacional de Abastecimento (CONAB) Instituto Brasileiro de Geografia e Estatística (IBGE) ISCC Oilworld

Type of information Production cost data Labour cost data Data on certified producers Production 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 of independent 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

Appendix

Model tree RTRS certification - extended Returning 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) X

Impact of Law one-off investments Producer-level cost and benefits of transition to RTRS (cost/farm)

+

Cost of compliance with national law (cost/farm)

Interest rate (%)

+ Revenue - Input cost ($*mt) Interest /lease cost for compensatory land ($) + ∆ Gross margin ($)

X Farm size (ha) X APP area size (%)

-

Benefits of compliance with law/ RTRS (cost/farm)

Avoided non-compliance cost ($) Yield of forest land ($/ha) + Yields from forest ownership ($)

X ∆ 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 of independent 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

Appendix

Internal control system costs (1/2) Cost of ICS per month

Comments ■ Provided is an overview of the costs of internal control systems provided through the interview program.

ICS

■ Due to a tendency for interview programs to result in overestimate of administrative burden, we have taken a conservative approach to modeling ICS. ■ In our model, we have assumed that the number of FTE required for ICS declines over time, as this function will be integrated into daily business. (a)

(a)

(a)

(a)

(a)

Internal audit

(a)

(a)

© 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 of independent 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.

Note:

(a) Wage level not provided by interviewee but taken from alternative source based on indicatedjob grade

33

Appendix

Internal control system costs (2/2) Cost of ICS per month

Comments ■ Provided is an overview of the costs of internal control systems collected from various interviewiees through the interview program.

Overview of ICS / internal audit costs Brazil Interv 1

Interv 2

Interv 3

Interv 4

Average

Currently used

1,1

1,3

ICS FTE Job grade Wage cost (full-cost) $ / month

2,5

1,3

0,6

0,1

Administrator

Agronomist

Administrator

Manager

2200 (a)

3080 (a)

2200 (a)

5000 (a)

3.120

1.181

5.500

3.850

1.283

438

2.768

1.477

0,3 Technician (a)

0,3

0,3

3.080

3.080

1.277

770

770

319

■ Due to expected bias, we have taken a conservative estimate Moreover, interviewees indicate ICS cost are likely to reduce over time. The figures used in the model are given under ‘currently used’.

Internal audit FTE Job grade Wage cost (full-cost) $ / month

Overview of ICS / internal audit costs Argentina Interv 1

Interv 2

Interv 3

Interv 4

Interv 5

Average

Currently used

2,5

0,1

1,2

1,0

ICS FTE

1,0

1,0

1,0

Administrator

Administrator

Administrator

Wage 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

1.000

0,7

0,3

Job grade

Administrator Controller

Internal audit FTE

1,0

0,2

0,8

Tech agron

Tech agron

Manager

Wage cost (full-cost)

1.750

1.750

4.000

2.500

1.500

$ / month

1.750

350

3.000

1.700

375

Job 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 of independent 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.

Note:

(a) Wage level not provided by interviewee but taken from alternative source based on indicatedjob grade

34

Appendix

Model effects of Good Agricultural Practices (1) Expert opinions on the cost-benefits of RTRS-required Good Agricultural Practices

# of experts

6

■ A number of RTRS requirements are related to GAP (RTRS 5.3, RTRS Standard for Responsible Soy Production Version 1.0) and some are additional to national law.

N=8

5 4

Net cost

3

Neutral

2

Net benefit

1 0 Pesticide

Comments

Fertilizer

Labor

Yield

Indirect effects (e.g. health)

■ Interview feedback on GAP (8 experts were interviewed) was strongly divergent .The general line is that farmers of 2.500+ Ha already apply good agricultural practices such as efficient pesticide use, as it makes business sense, and/or that farmers do not take a long-term view due to short-term leases.

■ If the values for the five cost-benefit levers of GAP (denoted here as pesticide, fertilizer, labor, yield and ‘indirect effects’) are changed, the business case changes.

GAP interventions required by RTRS

Cost- benefit

Pesticide

Applying ICM techniques. Avoidance of more toxic pesticide and use of ‘biological control agents’. (RTRS 5.4-9)

Benefit: One source in Argentina indicates farmers can save up to USD 9 per ha each year by applying IPM techniques (reducing the frequency of pesticide applications from 5 to 2). This estimate seems to be too high. No data was available on the yield effect of increased pest pressure.

Fertilizer

Perennial crops may serve as alternative fertilizer (RTRS 5.3)

Cost: Higher pesticide costs for killing perennial crop. Benefit: Reducing amount of fertilizer required. A study by Teasdale et al. (2007) reported no change in yields resulting from the application of a cover crop. Because of the long time horizon of fertilization effects, these can hardly be attributed to RTRS.

Labor

RTRS compliant no-tillage includes planting perennial crops and ploughing techniques.

(RTRS 5.3)

Cost: Planting perennial crops and more labour intensive ploughing and weeding techniques. Maintenance of riparian area.

Yield

Yields are affected by crop rotation programs, soil- and water quality maintainance. (RTRS 5.3)

Cost-benefit: A crop rotation program can reduce financial yields, while yields per hectare can be increased (Dick et al., 1991) A source in Argentina indicated 15% higher per/ha yields of soy in rotation with sorghum (presentation Albertengo, Aapresid 2009) . No data on profit reduction from rotating with less profitable crop is given.

Indirect effects

Health benefits for workers.

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 of independent 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

Appendix

Model effects of Good Agricultural Practices (2) GAP benefits of better pesticide usage (direct and indirect effects)

Comments

Calculation example Societal health costs of pesticide usage Total 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)

319

US$ / farm (calculation)

255

BRL/ha/year (CONAB 07-11)

Health benefits (assumption 5% of cost) *

Reduction of pesticide expenses Total expenditure on pesticide per ha soybean Reduction on pesticide expenses (1 % of total cost) **

Health benefits

3,315

319

USD / farm (estimate)

■ The example calculated here shows a calculation example of how an indirect effect of Good Agricultural Practice can be attributed to farmers based on a scientific publications. This calculation example based on a number of assumptions requires more context based evidence.

■ Indirect effect of IPM: Reduced health cost for workers. Experts agree that reduced exposure of workers to toxic agrochemicals reduces societal cost of health.

■ This example shows how the business case for certification changes, if the values for one of the five cost-benefit levers of GAP are changed.

■ To further detail the benefits of RTRS, a comprehensive temporal study on the costbenefits of applying GAP in accordance with RTRS criteria is needed.

USD / farm (calculation)

Reduction on pesticide expenses

3,315

USD / farm (estimate)

Total economic benefit

3,634

USD / farm/year

Assumptions: 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 farmers will use 19% more pesticde on other spraying doses. © 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 of independent 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.

Based on hypthetical costsavings which require more research

36

Appendix

Key assumptions regarding RTRS costs and benefits Item

Value Brazil

Value Argentina

Key assumptions

Management information system (set-up costs)

Far from cert $6.116 Close to cert $5.796

Far from cert $8.989 Close to cert $8.989

Includes professional services / implementator to set up the management system and training of workers / contractors.

Management information system (maintenance)

Far from cert 1,25 FTE initially 0,15 FTE after 4 years Close to cert 0,6 FTE initially 0,15 FTE after 4 years Wage cost $1.181 / month

Far from cert 1 FTE initially 0,15 FTE after 4 years Close to cert 0,6 FTE initially 0,15 FTE after 4 years Wage cost $1.000 / month

Dedicated staff is required to generate the documentation for RTRS compliance This requirement of dedicated staff reduces over time as information management become part of daily business routine For ‘close to certification’, the initial FTE requirement is assumed to be 50% as a (partial) information management system will already be in place.

A somewhat lower FTE is required in Argentina as contractors provide some of the required records to the producer Wage costs are ‘full cost’, including benefits, insurance, etc.

Internal auditor

Far from cert 0,25 FTE initially 0,1 FTE after 4 years Close to cert 0,13 FTE initially 0,1 FTE after 4 years Wage cost $1.277

FTEs Same as Brazil Wage cost: $1.500

Staff time at technical agronomist / supervisor level is required to do internal audits, checking that field records are done accurately, 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 business practices.

The FTE requirement for ‘close to certification’ is assumed to be 50% Wage costs are ‘full cost’, including benefits, insurance, etc.

Audit

Pre-audit: $3.557 Audit: $5.928 Surveillance audit: $3.557

Pre-audit: $3.380 Audit: $4.112 Surveillance audit: $3.240

Pre-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.

Community relations

$3.500 / year 3 years

$3.500 / year 3 years

These costs cover activities like upgrading the website to make it more informative for the farm’s neighbors, organizing activities to inform neighbors about the farm’s activities and informing emergency services.

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 of independent 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

Appendix

Key assumptions regarding law compliance* costs and benefits

Item

Value Brazil

Value Argentina

Key assumptions

Legal Reserve

26% LR deficit *(Cerrado) Cost of land $502 / ha (based on FNP) Environmental registration: $23 / ha Legal advisory: $960

N/A

Legal Reserve can be compensated by purchasing additional land. Based on literature (Sparovek 2010, 2011) we presume farmers far from certification are already 9% compliant in the Cerrado area, where 35% LR is required. Hence LR deficit is set at 26%. The costs of LR are included in the model as the interest rate on land purchase cost, assuming 5-year linearly phased compliance 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 by the 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 with LR. For APP, compliance costs were modelled from the first year of certification onwards. APP compliance cost are the cost of reforrestation. Additionally, productive acreage of an APP compliant farmer is lower, which implies a lower gross margin. The costs of reforrestation are depreciated over 10 year.

Complying with labour law

Far from cert $25 / ha Close to cert $0 / ha

Far from cert $16 / ha Close to cert $4 / ha

For Brazil we assume a 50% increase in labour costs for producers that are not compliant with labour laws (far from certification). This increase stems mainly from the switch from unofficial to official labour such that full taxes and insurance need to be included.

For Argentina complying with labour laws mainly involves switching from contractors that do not adhere strictly to the law to ones that do. Interview feedback shuggests that this may involve a premium of 10%-15%, which results in an additional cost of about $16 / Ha (one-fourth of this is assumed for ‘close to certification’).This also covers non-wage aspects such as adequate training and health and safety procedures.

Complying with agrochemical regulations (incl waste management)

Far from cert Infrastructure investments Triple wash: $1.100 per year (10 yrs) Waste storage: $2.200 per year (10 yrs) Gastank: $825 per year (10 yrs) Close to cert Gastank: $825 per year (10 yrs)

Far from cert Contractor costs Agrochemical storage: $2.500 per year

In Brazil, the key costs for complying with agro-chemical regulations relate to investments in infrastructure, including storage facilities for agrochemicals, triple-wash facilities, and storage facilities for agrochemical waste. These are assumed to be depreciated over their economic lifetime. Interest costs are modeled additionally.

In Argentina infrastructure requirements are covered by employing high-quality contractors (see previous item). Agrochemical storage can be outsourced at $1/ha.

Costs

Complying with the Stockholm/Rotterdam conventions may incur additional costs from switching to non-banned alternatives that are more expensive. The net cost-benefit of alternatives depends on many factors, including whether multiple application is required (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 of independent 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

Appendix

Key assumptions regarding law compliance costs and benefits Item

Value Brazil

Value Argentina

Key assumptions

Complying with Stockholm/ Rotterdam conventions

Far from cert $2,70 / ha

Feedback in Argentina suggested that many producers still use chemicals that are banned, such as Endosulfan. Switching to an alternative incurs costs (more expensive products) and benefits (longer residual effect) depending on the number of applications.

Feedback in Brazil suggested this is not an issue.

Seeds

Far from cert $6,25 / ha

The law requires royalties to be paid if the producer has a contract with the seed developer.

Costs (continued)

© 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 of independent 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

Appendix

Key assumptions regarding law compliance costs and benefits

Item

Value Brazil

Value Argentina

Key assumptions

Revenue from forrested land

Far from cert $15,40 / Ha

N/A

Producers are allowed to harvest trees on the non-LR part of the land that they buy in order to compensate for their Legal Reserve requirement.

Avoided noncompliance costs

$8.250 / year

N/A

Avoided fines as a result of compliance with national law, including conservation and labour laws. Modeled based on interview responses. 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.

Benefits

Premium

€1.50

A premium of €1.50 is assumed (after chain of custody costs) ; this is a realistic assumption considering that other crops, like RSPO certified palm-oil, have shown consistent levels of premium. Moreover, interviews indicate the premium on RED compliant biodiesel ranges between USD 20-45, leaving discretion for a producer level premium. In the current study, only the premium 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, we assume this discount 1) could apply to RTRS certified producers, 2) 75% of a producer’s input products is covered by the discount and 3) that in 20% of the cases where the discount is available, a more competitive product is available despite the discount.

Finance discount

50bp

A study indicates credit lines are available to all types of producers for investments in: 1. becoming law compliant 2. 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 discounts for 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 of independent 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

Contact Bernd Hendriksen KPMG Sustainability Director & Practice Leader Tel. +31 20 656 4500 hendriksen.bernd@kpmg.nl

Jerwin Tholen KPMG Sustainability Associate Director Tel. +31 20 6564500 tholen.jerwin@kmpg.nl

© 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 of independent 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.

This Report is exclusively drawn up for the purpose of a cost/benefit analysis of the certification of Brazilian/Argentinean soybean producers commissioned by the Stichting IDH Sustainable Trade Initiative (IDH) and for no other purposes.

KPMG Advisory N.V. ("KPMG") does not guarantee or declare that the information in the Report is suited for the objectives of others than IDH. This means that our Report cannot replace other investigations and/or procedures that others than IDH may (or should) initiate with the objective to obtain adequate information about matters that are of interest to them. It is not the responsibility of KPMG to provide information to any third party that has become known or available at any time after the date of the Report.

KPMG accepts no liability for the Report towards any others than IDH. The terms and conditions of the agreement under which this Report has been drawn up are exclusively governed by Dutch law, and the court in the district within which the office is situated has exclusive jurisdiction with respect to any disputes arising under or in connection with that agreement.