FAQ

About living incomes and Fairtrade Living Income Reference Prices

What is a living income?

A living income is defined as sufficient income generated by a rural household to afford a decent standard of living for all the household members, including food, housing, clothing, healthcare, children’s education, and a small provision for unexpected events.
 
What is a Living Income Reference Price?

A Living Income Reference Price is the price that farmers need to be paid to be able to invest in sustainable farm practices and achieve a living income, when other key parameters such as viable farm size and sustainable yields are met.  
 
Why did Fairtrade set Living Income Reference Prices? 

Decent and sustainable livelihoods for farmers and workers are central to Fairtrade’s mission, and a basic human right. A stable price that allows farmers to earn a enough for a decent standard of living is an essential component to realise this goal.
As part of our holistic living income strategy, we developed a reference price model to calculate the price that farmers need to receive in combination with other income drivers to enable tangible progress towards living incomes. Through close collaboration with key stakeholders, including farmers and traders, we pioneered    the first Living Income Reference Prices in cocoa in 2018, followed by vanilla, coffee, nuts, oranges, and more. 
We’re the only certification scheme with a Living Income Reference Price embedded in our strategy and that puts decent livelihoods at the centre of our mission. But even beyond Fairtrade, as we intended, the prices are serving as a reference in the respective sectors to guide companies in assuming their responsibility towards living incomes. 
That said, setting these reference prices is a first step. We  work with forward-thinking brands to put these prices into practice, along with taking action to achieve the other components necessary for a living income.  Monitoring and evaluation are important elements to measure progress and test what works. You can read about some of the results of living income pilot projects in our latest Living Income Progress Report.

What is the difference between a Fairtrade Minimum Price and a Living Income Reference Price?

The two pricing tools serve different purposes.

 Fairtrade Minimum Prices serve as a safety net and protect farmers against extreme price drops. They are mandatory for Fairtrade sales, and are based on cost of sustainable production. Fairtrade conducts broad consultations with stakeholders – including farmers, cooperatives, businesses and other industry experts – when prices are periodically reviewed and updated. The Fairtrade Standards Committee, made up equally of producer and commercial stakeholders, makes the final decisions on all price and Premium changes. Fairtrade farmers have been able to stay in business during the price crises in recent years thanks to the Fairtrade Minimum Price and Premium, but we know that many are still not earning a living income.

The Fairtrade Living Income Reference Price is what a typical farming family needs to receive to be able to earn a living income. It factors in average household size, viable farm size, a realistic and sustainable productivity level as well as the farm investments needed to reach this target yield and pay hired workers a living wage. Living Income Reference Prices are voluntary commitments for Fairtrade buyers who want to assume more responsibility for enabling living incomes in their supply chains.

My company wants to work toward living incomes in our supply chains. Where do we start with Fairtrade?

Companies can work with Fairtrade and the Fairtrade producer organisations they source from to develop projects to implement Living Income Reference Prices alongside other actions to improve  incomes. 
In addition to being paid Fairtrade Living Income Reference Prices, farmers need stability through long-term sourcing commitments from their buyers in order to make the necessary investments in their farms to reach sustainable productivity levels. This is also crucial for producer organisations to manage supply and demand, and thereby regulate production to avoid oversupply. 
Fairtrade works with companies and producer organisations to develop projects that address the other necessary elements that go into a living income mix, such as increasing productivity and exploring income diversification options, among other things. 
Reaching a living income for farmers is an ambition that will require collective action across the industry, not just Fairtrade alone. We welcome all interested companies to get in touch and learn more.

Details of the prices and how they are paid

Why is the Living Income Reference Price set at farm gate, while the Fairtrade Minimum Price is set at point of export (known as Free on Board, or FOB)? 

The Fairtrade Minimum Price applies to transactions between farmer cooperatives and traders at the point of export (known as “Free on Board,” or FOB), which means it accounts for costs to transport the goods to port and pay relevant export taxes. Fairtrade Minimum Prices are set in US dollars.  

Because the Fairtrade Living Income Reference Price is what an individual farmer actually needs to receive when selling their product, we set these prices at “farm gate” level, meaning the cost that cooperatives pay when they buy from their farmer members. The Fairtrade Living Income Reference Prices are also usually set in local currency. 

Based on this farmgate reference price, a Living Income Reference Price equivalent at FOB level can be estimated by adding the operational costs of the producer organisation as well as potential processing, transport and export handling costs. 

Why doesn’t Fairtrade just make the Fairtrade Minimum Price equal to the Living Income Reference Price? 

There are times when the global market prices have been at or higher than our Living Income Reference Price levels. For instance, this was the case in Colombia in 2021 when we launched our very first Living Income Reference Price for coffee from that country and currently the world cocoa prices have risen above the established Living Income Reference Prices for Ghana and Cote d’Ivoire. But the prices of many commodities are highly volatile. Raising the Fairtrade Minimum Price to an FOB equivalent of the Living Income Reference Price could result in farmers losing all Fairtrade sales, especially in times of very low market prices, leaving them in a worse position. 

For this reason, Fairtrade farmers have told us in consultations that they want us to take a careful approach to implementing Living Income Reference Prices and monitor how the market reacts, before deciding on drastic changes. We are committed to the journey towards living incomes for farmers, recognising that we also have to be mindful of current market realities. 

We also know that farmers and workers earning a decent living is a human right and an ever-increasing priority for consumers, brands, and retailers. This is why we will continue learning together and evaluate how to raise the bar for the entire industry and make paying Living Income Reference Prices the norm.

How do companies know what price to pay cooperatives then, to translate into a farm gate Living Income Reference Price? Does Fairtrade provide an FOB equivalent for Living Income Reference Prices?  

For some products and origins, technical roundtables have agreed on the average costs of operations and exports by producer organisations to set a FOB equivalent reference price. However, there is a broad variety of producer organisations with different cost structures, depending on their size and services they deliver to their members. Therefore, we recommend discussing FOB prices with the relevant producer organisation, to ensure the actual costs are covered.

Furthermore, farmers sell their crop to their cooperative at different times, which may be before or after the cooperative agrees on a contract with its buyer. Internal and external market prices change daily, therefore there isn’t a direct link between an export price agreed and the payment to the farmer. Because of this and other factors, such as exchange rate fluctuations, it is often preferable not to calculate one single rate for consistently converting a farm gate price to an FOB price. Companies should be transparent about the price they pay and should expect to cover costs associated with export on top of the Living Income Reference farm gate prices.

Do farmers received the full Living Income Reference Price?

We need to be very clear on expectations here. There are many factors beyond the control of an individual company and even if they commit to paying a Living Income Reference Price, this will not guarantee that farmers receive this in their pockets. Especially if a buyer doesn’t buy 100% of the cooperatives’ volumes, the price differential will likely be distributed across all volumes and becomes diluted. Furthermore, cooperatives’ operational costs will vary, depending on their size, services to members and distance to port, amongst other variables.  

Does paying a Living Income Reference Price guarantee that farmers earn a living income?

No. Sustainable Pricing is a critical enabler for living incomes and a precondition for many smallholder farmers to make the necessary investments for optimising productivity and enhancing resilience of their farms. A commitment to paying the refence price provides assurance to farmers of a decent return on the required farm investments, without having to compromise expenditures on essential household needs. 
However, the living income reference price (LIRP) is not sufficient to ensure that farmers effectively earn a living income. Several factors come into play, of which productivity and farm size are the most important. In order to achieve a living income with the sales of a certain crop, farmers need to reach sustainable yield levels and have a viable land area dedicated to this crop.

  • The Fairtrade Living Income Price model is a holistic concept, based on realistically attainable, sustainable productivity targets and a “full-employment” farm size. The net farm income of a full-time farmer with a sustainable yield would be at least equal to a living income if the produce is sold at a LIRP.  
  • Farmers themselves are responsible for adopting sustainable agricultural practises in order to attain sustainable yield targets, provided that they have access to the required inputs, technical assistance and financial means.
  •  Farmers with lower yields are likely not achieving living incomes with the sales of their crop. Complementary productivity improvement interventions may be needed in case the yield gap is significant.
  • By receiving the reference price, smallholders with inviable land areas are enabled to generate a proportionate share of a living income relative to the household labour invested in their crop, but will likely need complementary income sources in order to attain a living income. Since not all the family labour capacity is needed on the farm, household members would have time available to dedicate to other income generating activities.

Should the Fairtrade Premium be paid on top of LIRP? 

Fairtrade recommends that the Fairtrade Premium continues to be paid to the producer organisation on top of the LIRP, so that the producer organisation can support its members to invest in farm productivity and coffee quality, reduce costs, diversify incomes, for example by providing technical assistance, loans, subsidised inputs, etc.

Should quality differentials (for instance for coffee) be paid on top of the Living Income Reference Price?

Certain qualities fetch a higher price on the global market due to type and quality characteristics.  
The Fairtrade Living Income Reference Price is based on costs of a decent living, and cost of sustainable production for average quality. A higher quality product may cost more to produce, or be in shorter supply or greater demand and therefore command a higher price. This differential as compared to the market price at the time should be negotiated as part of the contract. 

What’s the difference between GIZ's living income reference price calculator and Fairtrade’s Living Income Reference Prices?

The underlying methodology for the calculation of the Living Income Reference Price are aligned by Fairtrade International and the German Agency for International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ).

However, it is important to note that the establishment of a Fairtrade Living Income Reference Price follows a rigorous data collection, analysis, and stakeholder validation process by Fairtrade International. The GIZ Living Income Reference Price Estimator instead offers the same calculation but based on user-entered data, the quality of which may vary.

GIZ and Fairtrade International generally dissuade the estimation of own Living Income Reference Prices in origins in which Fairtrade International already has established prices. Furthermore, we recommend contacting Fairtrade International before estimating own reference prices to see whether a price for the country and product of interest is currently being developed, and to discuss possibilities for establishing one if that is not the case.

Details on calculating the Living Income Reference Prices

How are the Living Income Reference Prices typically calculated?

The methodology used is different for generic and on-demand reference prices. The former is more robust whereas for the latter a fast-track approach is used. 

To establish generic reference prices for coffee, we work with Fairtrade farmers to collect their actual farm expenses and revenue. Technical roundtables were set up in the countries of origin with producer representatives and local experts to analyse these baseline data combined with other research, and internationally accepted benchmarks, to agree on realistic target values for the key parameters of the LIRP model. With those parameter values the Living Income Reference Prices were determined.

For on-demand reference prices we calculate the price farmers need to achieve a living income following a fast-track approach to determine the specific values for each price component, which are subsequently validated by a multi-stakeholder group to ensure the resulting prices are realistic and acceptable to farmers. Read more here.

Why doesn’t Fairtrade use actual productivity levels and farm sizes for calculating Living Income Reference Prices? 

The price model is based on a holistic approach that factors in realistic target yield levels, which can be achieved by adopting sustainable agricultural practices. The reference price is not expected to compensate for under-performance in terms of productivity, but farmers are also responsible for implementing the practices needed to achieve the target sustainable yield.    

Do you only consider the target crop as a source of income? 

Living Income References Prices are modelled on the basis of a viable crop area that fully occupies the available household labour force, which - with a sustainable yield level - should generate a living income from the target crop as the only source of income.  
This doesn’t mean that Fairtrade promotes mono-cropping. On the contrary, farm diversification is an important strategy to enhance income resilience. However, if the target crop is partly substituted by another crop, it is assumed that this other crop is as profitable as the target crop and would generate a proportionate share of a living income.  
  
 

About living wages and Fairtrade Living Wage Reference Price

What is a Living Wage Reference Price (LWRP)?

The Living Wage Reference Price (LWRP) is the price of a packed box of 18.14 kg fresh banana set for a specific banana producing country, that if paid for each sold box, would ensure that all workers on a banana plantation earn at least a gross Living Wage, as defined in the benchmark reports published by the Anker Research Institute. 
The Living Wage Reference Price is meant as an industry reference for commercial partners that want to contribute to achieving Living Wage gap in their supply chains. Currently there are living wage reference prices for each major banana producing country.

How is the Living Wage Reference Price calculated? 

At the simplest level, the Living Wage Reference Price (LWRP) is calculated by adding to the Fairtrade Minimum price the additional labour costs for closing the wage gap of the workers earning below the Living Wage benchmark. benchmark. 
When the additional labour cost for closing the wage gap is added to the Ex works FMP, we get the “Ex Works LWRP “, like wise when we add the additional labour cost for closing the wage gap to the FOB Minimum Price, we get the “FOB LWRP.” 

What are the methodological considerations in the calculation of the Living Wage Reference Price? 

The Living Wage Reference Price have been calculated by: 

  • Considering current prevailing wages earnt by workers; 
  • Increasing prevailing wages, of workers currently earning below the gross Living Wage benchmark, up to the level of the gross Living Wage benchmark;
  • Complying with the statutory labour contributions that employers have to be paid by law;
  • Considering workers at the basis of full time equivalent, taking as a reference the maximum number of working days allowed by law and the Anker methodology.
  • Considering current operational costs such as services, inputs, materials, etc., except labour costs.
  • Considering the total packed boxes produced by the plantation.
  • Considering a business margin of 10% of Ex Works costs.
  • Considering in-kind benefits (IKBs) as 10% of Net Living Wage Benchmark for the calculation of LWRPs that will be valid for 2024. During 2024, Fairtrade will collect data on IKBs received by workers for calculating the LWRP that will be valid for 2025. 
    Not considering any additional contributions, such as Fairtrade Premium, bonus, etc. 

What calculation is needed to get the labour costs? 

Hired workers earn basic wages and receive statutory and other benefits on top of the basic wages. The sum of basic wages PLUS statutory benefits PLUS Other benefits is EQUAL TO Labour Costs. 

What calculations are needed to get the additional labour costs? 

The additional labour cost are the labour costs for closing the wage gap of the workers earning below the Living Wage benchmark. It is calculated by adding to the “Wage gap”, the “Cost of the statutory benefits paid by the employer related to the Wage gap”. 

What data is used for the above calculations? 

The sources of data used for calculating the Living Wage Reference Price (and the Fairtrade Minimum price) are the a) validated cost of production data collected by the Fairtrade Standards and Pricing unit, and b) the Fairtrade wage data reported by plantations for compliance with requirement 3.1.4 of the Fresh Fruit Standards for Hired Labour. Also, it is used the c) gross Living Wage benchmarks of the Anker’ Research Institute updated for the same period of analysis.

What is the Living Wage Differential? 

The Living Wage Differential for the industry is the amount of money that a commercial partner may pay in addition to the FMP, that if paid for all sold boxes, would ensure that all workers of a banana plantation earn at least the gross Living Wage, as defined by the Anker methodology. 

How is the Living Wage Differential calculated? 

The Living Wage Differential is calculated by adding to the costs of the wage gap and the statutory benefits (“additional labour cost”) to the Fairtrade Minimum Price.

What is the Fairtrade Living Wage Differential? 

The Fairtrade Living Wage Differential (LWD) is the amount of money that a commercial partner may paid, in addition to the Minimum Price and Premium, to ensure that each banana box purchased under Fairtrade terms contributes to close the Living Wage Gap, as defined by the Anker methodology. 
The LWD is a voluntary contribution of a commercial partner for closing the wage gap in proportion to their Fairtrade volume. 

How is calculated the Fairtrade Living Wage Differential? 

The Fairtrade Living Wage Differential is calculated by deducting the Fairtrade Premium disbursed in cash (up to 0.30 USD/box) from the Living Wage Differential. 

How does the Living Wage Reference Price differ from the Fairtrade Minimum Price? 

The Fairtrade Minimum Price is a safety net that protects farmers when prices fall and gives them more stability. It is the minimum that a buyer must pay to the producer organization, in order to meet Fairtrade Standards. While it factors in the costs of paying wages as they currently stand and of paying the Fairtrade Base Wage, the FMP does not cover the additional labour costs for plantations to close the wage gap of workers earning below the Living Wage benchmark. 
In contrast, the Living Wage Reference Price is a voluntary payment that commercial partners can make to bridge the Living Wage gap in their supply chains. 

How does the Living Wage Reference Price differ from the Fairtrade Base Wage? 

The LWRP considers the total value of the gross Living Wage benchmark, while the Fairtrade Base Wage only the 70% of the gross Living Wage Benchmark.

Why isn’t the Living Wage Reference Price compulsory? 

Given the big differences between origins, making Living Wage Reference Prices compulsory could result in certain countries and plantations losing Fairtrade sales opportunities, leaving them in a worse position. For this reason, we want to monitor the situation closely when LWRPs are introduced on a voluntary basis, before deciding on drastic changes.

How will the payments be made in practice? 

The easiest way is to add the FLWD amount to the regular Fairtrade Premium payments, separately indicated for the Premium Committee to be able to account separately. The chain between retailer and Premium/FLWD payer needs to ensure that the Premium Committee has visibility on the retailer identify as otherwise FLOCERT will not be able to report back the verification results to the retailer. The Premium Committee accounts separately for all voluntary payments received and -based on information from the employer- maintains records of wages and wage gaps of all workers below the Living Wage. As the first step, the Premium Committee disburses the cash payments from the Fairtrade Premium (up to 30% currently) according to the rules set by Fairtrade standards. The Premium Committee disburses as a next step (or combined with the cash Premium payment) the total of voluntary payments in an equitable manner to all workers with a wage gap up until the wage gap is closed. Since voluntary payments to Premium Committees are not recognized as “wage” but as “bonus” the Premium Committee does not deduct any amount from received Premium or voluntary payments. Typically, the payment follows the existing schedule for cash payments. The Premium Committee maintains records for verification purposes and therefore makes these records available to the employer who shall report on the distribution to FLOCERT for verification. 

Is the LWRP the same amount, regardless whether it is paid to the employer or to the Premium Committee? 

Yes. The calculated differences are marginal and have been neglected in the final calculation. 
The main difference between the 2 receiving ends is that the Premium Committee can only distribute “bonuses” which do not lead to any entitlement of any worker. The employer however will incur legal obligation to continuously pay to workers once the employer has distributed voluntary payments to workers as these would be consider “wages”.