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.

LIVING INCOME REFERENCE PRICE (LIRP)

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