31 Jan 2020

A business case for living incomes

In industry conversations about sustainability and farmers being able to earn a living income, the question inevitably arises: What is the business case?

By Carla Veldhuyzen van Zanten, Fairtrade International, Senior Advisor Sustainable Livelihoods

2020 Coffee Living Income 870
Woman picking coffee beans, member of Norandino Cooperative in Peru
Eduardo Martino

There will be mention of triple bottom lines and – sooner or later – there will be the argument that shareholders in the end will want to see profit over social impact. And although most companies nowadays have set sustainability goals, the investment and measures required to achieve real impact can make boardrooms nervous.

But let’s look at it from the perspective of the business case for farmers.

There is still a long way to go for many smallholder farmers to earn enough to afford a decent standard of living. They can (provided they have access to sufficient knowledge and resources) adopt good agricultural practices which increase their productivity and enhance their farm resilience. They may be able to reduce their costs or they can try to diversify their farm income. Farmers might also add value to their products by improving quality or processing their raw materials.

Even so, many market-driven commodity prices are simply too low for productive, full-time farmers to see a return that is enough to support a decent living for their families, let alone invest in their farms. The lack of profitable (and legal) alternative crops has led to massive abandonment of farms, especially by young people who see no viable future in agriculture. This is especially prominent lately for coffee farmers in Latin America, many of whom are moving north as economic migrants, leaving behind ageing rural communities and once-prime coffee-growing land.

In order to tackle the poverty that is at the root of the vicious cycle of under-investment, declining productivity and income, and ultimately farm loss, Fairtrade is pushing to make living incomes a reality. And it’s clear that – even beyond the ethics of it – ensuring farmers can earn enough to live in dignity is also an essential component of a sustainable business strategy.

At Fairtrade, we work to strengthen farmer cooperatives and improve their capacity to create value for their members, including in areas like building entrepreneurial skills for efficient farm management and yield optimization. Guaranteed Fairtrade Minimum Prices are intended to cover the costs of production and protect farmers against extreme price drops. The Fairtrade Premium, the additional amount on top of selling price which cooperatives decide collectively how to use, often serves as seed funding for investments that contribute to higher incomes: technical assistance, subsidized inputs, processing facilities and more.

But more is needed, which is why we’ve developed a holistic Fairtrade living income strategy. We calculate Living Income Reference Prices to indicate the price a farmer should get in order to achieve a living income, if combined with complementary strategy components to increase productivity and quality, diversify income sources and potentially move up the value chain. Living Income Reference Prices are voluntary, and tend to be significantly higher than the current farm gate prices and the Fairtrade Minimum Prices.

Although a better deal for farmers will either affect the margins of companies further down the supply chain, or have to be passed on to the consumer, the relevant question for the future isn’t whether we can afford to pay prices that support a living income, but whether we can afford not to?

In the case of coffee, everyone throughout the supply chain, from producers to roasters to retailers to consumers, needs to play their part. The challenge of low prices is expected to persist, with high supply putting downward pressure on commodity prices. Meanwhile costs of coffee production have increased, including an estimated 74 percent increase in fertilizer costs in some areas of Latin America, per a 2019 Volcafe report. Consolidation amongst roasters and retailers has also squeezed small-scale producers into accepting unfavourable payment terms while companies profit.

Yesterday Fairtrade convened a forum in Utrecht, Netherlands, with key coffee industry stakeholders to discuss opportunities and challenges in creating sustainable supply chains that include living incomes. Participants include a balanced mix of European roasters, retailers, importers, traders, ethical lenders and non-governmental organizations, as well as representatives from government and civil society. Called ‘A business case for living incomes’, the forum will examine promising living income initiatives and real-world implementation issues related to living income reference prices, targeted programmes and other interventions, especially in view of the competitive and increasingly consolidated coffee market. A U.S.-based forum is also planned for later in 2020.

Through these dialogues, we hope to uncover insights that will spark new commitments and innovative approaches to enabling living incomes for coffee farmers. If we want to ensure a future with a choice of coffee flavours and origins, growing coffee must make business sense to farmers in the first place. Earning a living income is the business case for farmers, and thus a business case for everyone!