For smallholder farmers around the world, earning a decent living has long been a struggle. But a new report from Fairtrade International shows that paying farmers a Living Income Reference Price, designed to cover the costs of sustainable production and basic living needs, can significantly increase their incomes. This approach, which places co-operatives at the centre, offers a path toward lifting farmers out of poverty.
Fairtrade International’s senior advisor on sustainable livelihoods, Carla Veldhuyzen van Zanten, explains that the organisation’s work on living incomes started with a household income study on cocoa in West Africa, where they learned an “inconvenient truth”.
“We found that more than half of the producers were actually living in extreme poverty. And that was totally unacceptable”, she says.
“We needed to do something that upped our game and helped us to be more impactful in terms of lifting producers out of poverty and towards a living income.”
This led to Fairtrade International developing its Living Income Strategy in 2017.
Before this, Fairtrade had set minimum prices for a number of major commodities, including cocoa, coffee, bananas, tea and cotton. Still a key part of Fairtrade’s work, minimum prices act as a safety net for farmers when market prices drop. This, in addition to the Fairtrade Premium, which is a fixed amount added to the selling price that producers can then invest or use to top up their income, helps producers improve their incomes. However, Fairtrade International acknowledges that these measures are not sufficient for realising living incomes.
Minimum prices are based on a global average cost of production for each commodity, which doesn’t adequately reflect the reality for every different producer, says Veldhuyzen van Zanten.
“The concept of the minimum price was always meant to cover cost of production, but it never really took into consideration that, beyond covering cost of production, farmer families actually need to live decently, and that comes at an additional cost.”
To address this, the Living Income strategy takes a holistic approach involving three key pillars – responsible procurement, sustainable production, and advocating for an enabling environment for producers. It relies on all stakeholders in the system taking joint responsibility, from farmers and producer organisations to traders, brands, retailers and governments.
In particular, Veldhuyzen van Zanten highlights the role of co-operatives. In other industry programmes, external partners provide co-ops or individual farmers with interventions, without giving them ownership of the activities, but “our strategy has a very important role for co-operatives at the centre”, she says. “We’re very much focused on building the ownership by the co-operatives and ensuring that they’re the ones who are strengthened to then provide better services and to support their members towards achieving living incomes.”
When it comes to responsible procurement, Fairtrade’s joint responsibility approach requires both farmers to reach a sustainable productivity target, and buyers to pay a price that covers the costs involved.
In collaboration with farmers’ co-ops, Fairtrade has calculated country-level Living Income Reference Prices for cocoa from Côte d’Ivoire and Ghana and coffee from Colombia, Indonesia, Uganda, Honduras, Ethiopia, Peru and Nicaragua, through a process of economic baseline analysis of farm records and stakeholder dialogue through technical roundtable workshops.
Hafursa Cooperative, part of Yirgacheffe Union, took part in the farm income baseline assessment for Ethiopian coffee farmers as well as a living income technical roundtable workshop in Addis Abeba last year.
In an interview conducted by Fairtrade International, co-operative manager Meskelu Gebre explained that although the co-op members’ livelihoods are largely dependent on coffee, they did not know how to separate their income and expenses for coffee production in the past.
“Based on this project, our farmers now have a better understanding of the costs and income associated with coffee production”, said Gebre.
He added that they “admire the participatory approach of defining the price and the way Fairtrade involves producers in every step of the entire process”, and that “the living income price will surely change the livelihoods of our farmers”.
In addition to this, Fairtrade has developed a ‘Living Income Reference Price on demand’ service offer. A range of reference prices have been calculated in partnership with commercial partners for their specific supply chains and products. For instance, Coop Switzerland has been working with Fairtrade on Living Income Reference Prices for a range of products from rice, to mango, to coconuts, as well as cocoa from Ecuador.
Aline Roth, sustainability expert at Coop Switzerland, said: “We pursue the vision of paying living wages along our supply chains and purchasing raw materials at prices that enable a living income.”
The optimisation of farm yields holds potential for significant income improvement for farmers. And yet, says Fairtrade, numerous programmes aiming at productivity improvement over the past decades have not been successful in lifting smallholder farmers out of poverty.
“What we find is that just addressing productivity is not going to be enough,” says Veldhuyzen van Zanten.
“You can improve incomes a fair bit in some cases, but still, it’s not going to be enough, and it’s likely not going to be sustainable either, because the impact of productivity increase tends to press the price down, so the net result of just productivity improvement is not going to help farmers have a better income.”
Fairtrade’s approach to productivity improvement focuses on sustainable practices, for instance, cocoa co-ops in west Africa subsidising “labour brigades” to help with pruning, or investment in a biofertiliser plant by Red Ecolsierra in Colombia, and always in combination with the other elements of its Living Income Strategy.
“We want to make it very clear that [productivity] alone is not going to be enough to achieve living incomes for farmers,” says Veldhuyzen van Zanten.
Another key pillar of Fairtrade’s strategy is advocacy. On living incomes, Fairtrade seeks to: amplify the voices of farmers; build coalitions; influence policy; establish living income benchmarks; and raise the profile of responsible procurement practices.
In May last year, Fairtrade Africa and Fairtrade International organised the first producer-led industry summit on living incomes for cocoa farmers. Held in Abidjan, Côte d’Ivoire, over 100 participants took part in the event, with around half being farmers or co-op representatives.
At the summit, cocoa co-operatives and industry organisations agreed on a joint declaration calling on companies and policymakers to take action in support of living incomes for farmers.
To test and validate the assumptions underlying the Living Income Reference Price model, Fairtrade International launched its living income learning project in 2020. Six Ivorian cocoa co-ops took part through the introduction of a farm management tool.
200 households in each co-operative were supported to keep records of their farm expenditures, worktime investment, production, and sales. These records were compiled, analysed and compared against the assumptions made for the Living Income Reference Price calculation over two consecutive years.
The study found that, after the first year of implementation, 21% of farmer households had reached a living income, with average net earnings of $4,735. The percentage then dropped to 18% in the second year with an average of $4,220, partially due to droughts causing production losses.
Overall, the report notes that with an average of 48% of total production volumes sold at the reference price, farmers earned an average 15% more for all their cocoa sold. Moreover, the cooperatives that sold an even larger share of their volumes at the reference price earned up to 47% higher cocoa revenues.
Per kilo sold at the Living Income Reference Price, farmers were found to receive on average 63% on top of the farmgate price.
The implementation of farm records is also benefiting farmers, who gain better insight into their expenditures and revenue flows, and learn how to manage their farms and their household budgets more efficiently.
Special attention was also paid to making sure that couples were jointly involved in the exercise to get a complete picture of the family business and more recognition of the work done by women and the income they generate for the household. The assumption was that this would lead to women having a stronger say in running the farm and deciding how the household money is spent.
Daouda Coulibaly, a producer at Ecojad, one of the co-ops participating in the study, said: “Since the passage of coaches and the training we received, we follow our farm records regularly and the financial management is going well. I now involve my wife in the management of the household and harmony and cohesion reign in our household.”
Fairtrade’s learning project has now come to an end, but the co-ops involved own the data that has been collected and can continue the monitoring work, says Veldhuyzen van Zanten.
“The co-operatives are actually using that now to do their negotiations with their customers. So there’s that empowerment aspect to it that’s quite unique.”
Fairtrade’s aim for the next year is to “take stock and reflect on what has been achieved so far”, including further analysis of the project data, assessing the effectiveness of the Living Income Reference Prices set so far, and using the lessons learned to develop a portfolio of services for businesses and producer organisations looking to improve incomes.
A new Living Income Innovation Fund will be created to support future projects, and Fairtrade International is also looking into the possibility of a ‘Fairtrade Plus’ standard for products, to reflect additional living income commitments by companies, so that these can be externally verified and distinguished by consumers.
Fairtrade International’s reference price setting work will continue in 2024, and they encourage potential partners wishing to find out more to get in touch.
