19 Apr 2024

What (nearly) everyone gets wrong about the Living Income Reference Price

Farm record bookkeeping cocoa Cote d Ivoire Finda Kouadio Théodore 870
Ivorian cocoa farmer Finda Kouadio Théodore fills in his farm record book with details of his harvest season.
Mohamed Aly Diabaté/Fairtrade International/Fairpicture

Carla Veldhuyzen van Zanten, Fairtrade International’s Senior Advisor for Sustainable Livelihoods, demystifies the concept of a Living Income Reference Price, and debunks some common myths.

Whenever I talk about Living Income Reference Prices, people want to argue that price alone isn’t the answer. Always! The arguments range from:

“You should also look at productivity, income diversification and so on”, to

“With a higher price you’re not lifting the smallest farmers out of poverty,” to

“You cannot interfere with prices as these are dictated by supply and demand.”

So let’s unpack what a Living Income Reference Price is – and isn’t.

A Living Income Reference Price isn’t “just about price.”

A Living Income Reference Price is the price that a typical farmer household with a viable farm size and a sustainable productivity level needs in order to earn a living income from the sales of their crop.

We develop these prices based on a holistic price model that factors in the local costs of a decent standard of living for a typical household, a realistic and sustainable productivity level for the region, and the farm investments needed to reach this yield level, including the cost to pay any hired workers a living wage.

Reference prices are therefore based on a joint responsibility between farmers and their buyers:

By paying the reference price, the buyer enables the farmer to invest in their farm and produce sustainably, while ensuring a decent return on their investment. Farmers in turn need to improve their productivity and likely also diversify their sources of income to be resilient and not only rely on a single crop.

Living Income Reference Price isn’t meant to guarantee a living income from the smallest farms.

The reference price model is rooted in the universal human right for everyone who works to be remunerated fairly, ensuring an existence worthy of human dignity. In other words, a farmer has the right to make a living income through what their farm produces – when it’s a full-time job.

The price equation therefore includes the concept of a “viable farm size,” which is the crop area needed to absorb the average available adult household labour, assuming sustainable agricultural practices are adopted. But when a farming family has too little land to fully occupy the available adult workforce, they can’t solely depend on it to support the household.

So whereas full-time farmers would be able to earn a living income if they get paid a Living Income Reference Price, farmers whose farms are small enough that they only work their land part of the time would make a proportionate income, and would need to complement it with other income generating activities to reach a living income.

Are there better ways to support the poorest farmers other than via price?

It is obvious that farmers who have very small farms and tiny volumes gain relatively little from a higher price, that much is true. A concept that is currently popular is cash transfers: a fixed amount of cash paid to individual farmers, regardless of how much they sell, and sometimes targeted to specific vulnerable groups, such as very small-scale farmers, or women in the household. In some cases the cash is paid unconditionally to boost incomes, but often the payment is released after farmers meet certain conditions, such as enrolling children in school or investing in a certain farming practice.

So is this a viable solution? Any extra cash will surely be welcomed by farmers. But cash transfers create a dependency on the goodwill of a partner and are usually only provided for a limited time, whereas sustainable prices aim to be embedded in responsible business practice and seek structural change.

For Fairtrade, “trade not aid” is at the core of our philosophy. More than 35 years ago, our founding father Frans van de Hoff – who recently passed away at age 84 – listened to Mexican coffee farmers who told him that they didn’t want charity, but rather a better price and fairer deal so they could look after themselves. Fairtrade producers are democratically organized and jointly decide how prices and premiums are distributed. This can be based on principles of solidarity in support of the most vulnerable farmers among them. Fairtrade Premium funds – the extra money that cooperatives earn as part of their Fairtrade sales – are a key resource to invest in other income-generating activities or community services targeting those farmers with specific needs.

What about the laws of supply and demand?

Yes, price interventions disrupt the economic laws of supply and demand, but Fairtrade is about transforming trade in which producers aren’t merely price takers, but their products are valued.

To make this work and avoid massive oversupply, it is crucial to build long-term commercial relationships between producers and their buyers. Based on long term sourcing forecasts, producer organisations can plan their business and manage supply in relation to the demand. For example, they can put a halt to accepting new members or support members to diversify their incomes if the demand is low, or on the contrary, provide extra services to increase productivity when the demand grows.

And supply and demand still apply – we are seeing this now with cocoa futures recently topping a whopping $10,000 per tonne, largely as a result of a significant drop in productivity caused by a variety of reasons. As of 1 April, the government of Côte d’Ivoire increased the price that cocoa farmers are paid by 50% compared to the previous season, to €2,287 per tonne. This price exceeds our current Living Income Reference Price for Ivorian cocoa (€2,200), which is positive news. However, the price effect is largely cancelled by the failing harvests, and it remains to be seen how farmers’ incomes are affected.

Paying farmers more – not just in short spikes but consistently – matters. A living income supporting price is a critical aspect of responsible purchasing practices, alongside long-term sourcing relationships.

Living Income Reference Prices embody Fairtrade’s mission and go back to its roots: Pay farming families enough so they can decide on their own futures. Grow their crops sustainably, increase yields and sell at a profit that allows them to live in dignity.

Fairtrade cocoa farmers and other representatives will be at the World Cocoa Conference in Brussels 21-24 April. Carla is speaking about Living Income Reference Prices on a panel called “The true cost of cocoa” on Tuesday 23 April.