Living income strategies (Oxfam)

Our key takeaway: We know that many small-scale farmers are working hard to produce products we rely on every day - rice, cocoa, cotton, vanilla etc. - and yet they cannot afford a decent standard of living - for themselves and their families. Solution: simply increase farmer incomes? It’s not that simple. With the long supply chains that exist in the food sector, a price escalation effect kicks in. An increase in incomes for farmers can result in very high prices for consumers, where every actor in that value chain adds a percentage to the higher price as a margin on turnover. How can we ensure farmers are paid sufficiently to afford a decent standard of living, while ensuring consumers can afford the food produced? Enter the ringfencing concept, where the cost of the premium is ring-fenced in an open-book ‘triangle agreement’ between the retailer, the importer and the exporter. This helps farmers get paid more, while protecting the company and consumer from ballooning prices. Win-win? Yes, so long as certain conditions are met. Oxfam’s pilot project in Pakistan focused on basmati rice farmers highlights that benefits for the most vulnerable small-scale farmers hinges on applying a human rights lens, aligning supply chains with living incomes, getting the data right and prioritising business transformation and action at various levels.

Oxfam published ‘Price Interventions as a Part of Living Income Strategies: Lessons learned from piloting a price premium mechanism for basmati rice farmers in Pakistan’ (March 2023):

• Living income and poverty: Oxfam delves into the issue: “[s]mall-scale farmers produce many globally important products such as rice, cocoa, cotton and vanilla. Poverty is widespread in these smallholder sectors and farmers are often unable to meet their basic needs.” Therefore, the topic of living income “deserves to be central to discussions about the changes needed within the global food system – including changes to the unequal distribution of power and value within supply chains and the low and declining prices paid to farmers.” Oxfam makes the case that “paying a living income is the responsibility of businesses and should not be seen as an optional choice, even where there is no formal legal obligation for them to do so. Companies should ensure that their own conduct does not prevent farmers from earning a living income.” This in turn is connected back a company’s pricing decisions, since “incomes depend largely on the prices that farmers receive for their products.” However, there remain a number of issues ensuring that any increases in the prices paid to farmers actually translate into tangible benefits to farmers. In particular, an increase in incomes for farmers can result in very high prices for consumers in long supply chains, where every actor in that value chain adds a percentage to the higher price as a margin on turnover. Because of this price escalation effect, “few companies are currently using pricing as a core strategy to address farmer incomes.”
  

• A novel price premium mechanism: Oxfam has been testing out a new approach to price premiums. In this approach, the idea is to increase the incomes of the most vulnerable small-scale farmers (here, basmati rice farmers in Pakistan) while ensuring costs to retailers and consumers do not escalate. The price escalation effect can be avoided by creating an open-book ‘triangle agreement.’ In short, the company could transfer the premium directly to the farmers by ringfencing the cost of the premium in an open-book ‘triangle agreement’ between the retailer, the importer and the exporter, outside of the usual business transaction. The pilot found that this mechanism for price intervention benefited the most vulnerable small-scale farmers, who face significant gaps in earning a living income from rice. However, to enable this, certain key factors for success needed to be considered.
  

• Eight factors for success of price premiums: First, don’t prioritize larger, better-off farmers because their income gaps are smaller and easier to close: the priority has to be vulnerable smaller-scale farmers. Second, take actions to ensure that price interventions do not reinforce gender inequalities. Third, focus on establishing a traceable value chain with direct trading relationships with farmers. Fourth, invest in longer-term trading relationships with farmers, including long term contracts, favourable contract terms and integrating living incomes into procurement strategies and objectives. Fifth, have transparent and accurate information - capturing key data points from all suppliers and at the farm level. Sixth, ensure the needs and living wages of farm workers/labourers are factored into the living income of farmers. Seventh, prioritise business transformation which entails seeking to tackle the various barriers to sustaining fairer prices. And eighth, take actions at various levels to ‘raise the floor’ for the food and agriculture sector as a whole (for instance with regard to peers, governments, certification schemes and consumers).