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Farmgate Price: An Important – But Partial – Piece Of The Sustainability Puzzle

Paul Hicks
September 19, 2017
Key Insight

We need to learn the relationship between farmer income and a living income. So… yes, price is important but is still a limited indicator of sustainability and farmer livelihoods.

Jaime Alonso Arévalo Gómez, 41, a cocoa producer from Cantón Cangrejera, Izalco, Sonsonate, municipality, El Salvador, shows cocoa pods almost ready for harvest. Photo by Oscar Leiva for CRS.

In March, I wrote about my reaction to Kickapoo Coffee publishing a minimum FOB pricefor all their coffees. That article focused on Kickapoo and other efforts to make pricing more transparent – an aspect of the specialty coffee business that can be quite murky. I had 3 takeaways of things that I liked about this approach: a transparent approach to price setting; a movement away from the commodity price as the benchmark; a very public commitment to pay higher prices. Additionally, there were 3 questions I posed: what is a 2.75 coffee? What goes to the farmer, or what is the farmgate price? and finally, a reminder that high price does not correlate to improved farmer livelihoods.  While many coffee pricing transparency reports show the average FOB price (see this great Counter Culture report from 2015 as a good example), FOB pricing is the amount paid for the coffee once it is stored, processed, bagged and transported to the port, ready for export. It is not a reflection of what the farmer actually received, or the farmgate price.  Estimates of farmgate as a percentage of FOB run from 60-80% in the coffee sector, depending on the origin and the number of actors in the value chain.

Meanwhile in the even more opaque chocolate industry, our friends at Taza Chocolate broke new ground when they published not only FOB prices but also the farmgate prices paid to cacao growers. The company’s annual Transparency Report also laid out a “5 Steps toward Understanding Price” to help consumers navigate the numbers and evaluate the larger question of farmer well-being. Last month, cacao bean trader Uncommon Cacao released its own Transparency Report that includes estimates of farmer income from selling cacao beans.

I found the level of detail in these reports to be really interesting and relevant to our work on increasing farmgate price, so I reached out to Jesse Last, Taza Chocolate’s Director of Cocoa Sourcing to have an exchange on the nitty gritty of pricing transparency.

KK:  Jesse.  Thanks for agreeing to discuss these issues with me for the blog.  Can we start with why Taza decided to collect and share farmgate pricing?

JL:  My pleasure, Kraig. It’s exciting to discuss this important topic with you!  As you know, Taza’s mission is “To make and share stone ground chocolate that is seriously good and fair for all,” and this includes the farmers growing cacao. Quality begins at the farm level. If farmers harvest cacao pods too early or neglect to remove bad beans, the chocolate suffers. This is particularly true in a dark, minimally processed chocolate like Taza’s – you can taste the bean in our bars. We collect farmgate pricing because price is one, although far from the only, indicator of whether the farmers who grow our cacao are sharing the reward of making a great product.

We subsequently published our findings because we believe that anyone who eats our chocolate deserves to know the story behind it. In pioneering a radical level of transparency down to the farm level, we hoped to spark a conversation between farmers, processors, chocolate makers and consumers around the creation of a chocolate industry that is seriously good and fair for all…the type of exchange that the two of us are having today!

Why does farmgate price matter to you and CRS?

KK: CRS works primarily with poor and vulnerable farmers and we believe that one of the best ways to help raise farmers out of poverty is to connect them to markets. Due to many reasons (low volumes, poor market information, lack of infrastructure), producers are predominantly price takers, receiving prices that are less than half of the FOB price.  A key approach to our work in coffee and cocoa value chains is to first map is to map out the flow of goods and cash from farmer to final consumer, to understand where the efficiencies and barriers lie. Keeping in mind that price is just one variable in the income equation (volume x price = income), we want to understand what are things that farmers can do to obtain a higher price?  Do they need to better understand the market; are there ways to improve quality?

I’m curious as to what you found when you explored the farmgate data from your origins?

JL: We found a lot of variation by origin. Local context has a major impact on farmgate price. For example, in 2016, our partner in the Dominican Republic, OKO Caribe, paid farmers $2,694 per metric ton of cacao, equal to 73% of the FOB price paid by Taza to OKO. Meanwhile PISA, our partner in Haiti, paid farmers $1,944 per MT, equal to 50.9% of the FOB price. When I saw these numbers, I wondered if OKO was doing right by farmers and PISA was taking advantage of them. But when I dug a little deeper, I found that nothing could be further from the truth.

I learned that small farms and old trees mean Haitian cacao farmers produce very little. PISA must collect beans from nearly 1500 producers in order to export 100 metric tons of cacao. Across the border in the Dominican Republic, OKO works with only 180 highly productive farmers but can export 10 times as much! Logistical challenges in Haiti also include certifying the supply chain as organic, an effort that requires 15 company agronomists. The cost of doing business grows further due to limited infrastructure including poor roads and unreliable ports drubbed by natural disasters. Despite these challenges, since PISA entered the market two year ago, they have pushed up bean prices by 300 percent.

From these and other examples, I’ve come to the conclusion that there is not a single, holy grail number that represents a good or fair farmgate price for cacao. Ironically perhaps, I finished writing Taza’s Transparency Report with real concern that if consumers were to make purchasing decisions based on farmgate prices alone, without the context that is so critical to making sense of them, then highly impactful supply chains like PISA’s could be misunderstood and unfairly disparaged.  

Does your own experience in coffee mirror mine in cacao?  What impacts farmgate price in coffee?

KK: I agree that farmgate is really context dependent and you have identified a number of reasons.  Farmgate depends on where farmers are located physically –  can they quickly get their products out to port? It depends on how efficient and transparent the farmer organization is.  Looking more specifically at our projects, a lot of the FOB pricing has been driven more by scarcity than by quality per se, and I think that is quite interesting.

For example, in our Blue Harvest project in El Salvador, Honduras and Nicaragua, it was the coffees from El Salvador that sold for the highest prices, even though they couldn’t offer the volume, quality or consistency that the other origins had.  There is a hyper-fetishizing about having something that no-one else has, which drives a lot of the pricing.

JL: So if farmgate price is not, in fact, a ‘holy grail’ for assessing supply chain equity and sustainability, what else do you consider?”

KK: What a great question.  Let’s break that down into the 2 pieces.  Equity and Sustainability.  I think transparency and price are two great indicators of equity in a supply chain.  At the end of the day, do farmers feel like they had power to negotiate a price that they feel is fair?  To me this needs to consider what the cost of production is in order to understand what is fair. Here, I feel that price isn’t a great indicator for sustainability. If we look at your report and that of Uncommon Cacao, what am I to make of the fact that farmers in your supply chain gained incomes of $400-$500 from selling into your supply chain.  Yes, it is more than they would have made selling into other ones, but on first glance it is clear that a sustainable cacao farmer must have other sources of income.  Here is where a tool like the living income benchmark might be of use.

How about for Taza, are there other indicators you are looking at adding to your report?

JL: I’m interested in this idea of a living income benchmark. One of the tensions we feel at Taza is between the desire to collect and share lots of data in the interest of transparency, and the money and time required to do so. As a small, family-owned company, we have to manage resources carefully, and deep dives into impact can be expensive. Any tool that simplifies data collection and communication to our consumers has real value.

As far as other indicators used in our report, I discuss how our partners reduce farmer labor by driving to farms to collect cacao beans, and how they support higher productivity by delivering agronomic training and subsidizing seedlings or inputs. They can also reduce price volatility by paying a fixed price for cacao, which buffers producers against boom and bust market cycles that discourage investment and in the worst cases, can bankrupt farmers. These types of benefits are hard to capture in a single indicator, but they are absolutely critical to evaluating whether a supply chain is fair for all.

KK: Jesse – thanks for the exchange of ideas – this was interesting and provided a lot of insight into Taza’s cocoa pricing and how you think about sustainability.

Based on this discussion with Jesse, I think it’s fair to say that farmgate price is not the end all be all for farmer livelihood in our experience. But nor is it insignificant.  It matters, and it’s just one variable in the Price X Volume = Income equation. Moreover, for many coffee and cacao farmers out there, this crop is just one source of income for their family.

From my perspective, as an advocate for small farmers, I need price to be ABOVE cost of production.  At least by 20% or more.  However, we don’t know enough about cost of production and farmer incomes for coffee and cocoa.  We have small data sets and handpicked examples.  We need to learn the relationship between farmer income and a living income. So… yes, price is important but is still a limited indicator of sustainability and farmer livelihoods.