Why This Matters, and Why Now
The contemporary agri-food sector faces a profound challenge that threatens the socio-economic stability of smallholder farmers worldwide: the pervasive inability to secure a living income. This issue stems from multiple factors, including limited arable land, suboptimal agricultural productivity, and inequitable value distribution within supply chains. As global commodity prices fluctuate, smallholder farmers remain vulnerable, often unable to influence market trends or earn a fair share for their products.

Amid these challenges, the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) marks a critical juncture for international supply chains, mandating higher social responsibility standards for commodity buyers. This regulation offers a unique opportunity to create a level playing field, benefiting all producing countries equally. The white paper’s release is timely, aiming to harness this regulatory shift to drive significant, data-informed changes across global supply chains.

Introducing the White Paper
The Commodity Living Income Strategy is a data-first intervention aimed at achieving living incomes in commodity supply chains. It is founded on principles of fair value distribution and data-driven decision-making, advocating for a two-pronged intervention approach: first, assisting producers, organized producer groups, and their supply chain partners in understanding their cost-efficiencies and living income price gaps; second, it leverages this data to design holistic intervention strategies tailored to local sustainability, production, and quality needs.

This white paper introduces two key methodologies:
1. Living Income Price (LIP): The LIP calculates the price per unit of a commodity based on its actual production costs across various supply chain stages (farmgate, producer organizations or “cooperatives”, and Free on Board. This approach helps establish a minimum viable price floor, ensuring that producers are compensated fairly for their sustainable and efficient production efforts.
2. Cost-Yield Efficiency (CYE): This CYE categorizes producers’ efficiency by considering both their costs and yields. It provides a nuanced understanding of efficiency levels among farmers, identifying areas for improvement and forming the basis for tailored intervention strategies.

The strategy presented within this white paper encapsulates both methodologies, providing a structured approach to understand both productivity and efficiency aspects of pricing, and identify the necessary interventions to bridge living income gaps. It addresses the critical question: Where is this supply chain currently, and how far do we need to go to achieve sustainability? Moreover, it promotes data-driven, defensible decision-making involving both efficiency and pricing interventions, strategically co-created with supply chain stakeholders, and, most crucially, with farmers themselves.

“By leveraging real, verifiable data, and investing in both efficiency and pricing interventions, we can set a new standard for transparency and accountability in global supply chains,” said Antoinette Marie, director of Heifer Labs, a digital technology unit within Heifer International.

Commitment to Transparency and Open-Source
By making the parameters and tools publicly accessible and open-source, Heifer and Fairfood aim to inspire industry-wide change. This transparency is designed to foster a community of informed stakeholders, enhancing dialogue and collaboration across the supply chain. The Open-Source Toolkit previewed in the White Paper will provide practical resources for implementing LIP and CYE methodologies, driving sustainable practices, and ensuring that all stakeholders can contribute to and benefit from these innovations. “This is not just about compliance or corporate responsibility,” said Sander de Jong, managing director of Fairfood International. “It’s about recognizing the human side of supply chains and committing to a future where every farmer can live with dignity.”

Download the white paper here.

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This White Paper outlines a data-first intervention strategy, designed by Heifer International and Fairfood International, aimed at achieving living incomes in commodity supply chains. It is founded on principles of fair value distribution, transparency, and data-driven decision-making. It advocates a two-pronged approach: first, assisting producers, organized producer groups (or “cooperatives”), and their supply chain partners in understanding their cost-efficiencies and living income gaps; second, leveraging this data to design holistic intervention strategies tailored to local sustainability needs. To implement this approach, Heifer International and Fairfood International have developed two key instruments: the Living Income Price (LIP) and Cost-Yield Efficiency (CYE) methodologies.

Read more here.

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The revolving credit facility will pilot more-efficient dissemination of loan funds to qualifying coffee cooperatives participating in Heifer International’s Beyond Coffee II Project in Chiapas, Mexico. The investment will be facilitated through the EthicHub ReFi platform, a pioneering web-based platform serving smallholder farmers for whom traditional finance solutions have historically been less accessible and available. In Mexico, less than 6% of farmers have access to credit in the traditional finance sector.

Devised as an innovative and more-targeted way to strengthen access and timely availability of capital to smallholder coffee farmers, the investment will address shortcomings hindering access to finance, such as high transaction costs, long lead times to approval and disbursements, fixed collateral requirements and other well-known barriers to credit.

The revolving credit line is designed to provide working capital directly to coffee cooperatives during the harvest season. As only 1.5% of financial products are channeled to the rural sector, smallholders often struggle to access financing, which is often not aligned with farmers’ productive conditions. The credit facility will remain open for other purposes to secure financing and is intended to demonstrate the viability of using this financing instrument to provide more ready and efficient access to capital to pre-selected cooperatives in Chiapas.

“Smallholder farmers are the backbone of the agricultural industry in Latin America, and they face significant challenges in accessing sector-specific and efficient financial instruments,” said Jorge Barrigh, Heifer Impact Capital’s regional director for the Americas. “Our investment with the EthicHub ReFi platform enables us to address very specific challenges that for too long have represented obstacles to an efficient and streamlined capital delivery system all the way to the last mile in rural Latin America.”

The investment aims to significantly ease the availability of finance and access to targeted cooperatives at a 9.9% interest rate ceiling, competitive with the average interest rate in Mexico. In a bid to implement a more integrated solution that addresses shortcomings beyond interest rates, this solution also seeks to simplify and “open” the black box of costs and processes that often delay timing in approvals and delivery of resources.

By emphasizing the importance of a more transparent and traceable process, the initiative will directly benefit from the use of blockchain and smart contract innovations that prioritize speed, security and transparency, while also adopting an innovative approach to the risk-collateral solution, which is often among the more complicated obstacles for smallholder farmers.

Heifer Impact Capital’s investment reflects its commitment to build partnerships with country offices and programs, as well as forward leaning accelerators such as Heifer Labs that ease the leveraging and field-testing of innovative approaches — much-needed solutions to mainstreaming sustainable and bankable investments that strengthen targeted agricultural value chains in Latin America.

The Heifer-EthicHub relationship will provide game-changing field experience and insights that showcase the application of fintech solutions in mainstream finance vehicles to benefit smallholder farmers in last mile applications.

HIC and Heifer Labs are strongly committed to innovating, improving and amplifying choices in access to capital for farmer-owned businesses and agri-entrepreneurs to tangibly improve livelihoods, promote sustainable agriculture practices, and spur cascading positive impacts in these underserved rural economies.

For more information on HIC and its work in Latin America, visit their website at https://www.heifer.org/our-work/our-model/impact-investing/index.html

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Rooted in transparency, the new pricing model determines the minimum price farmers need to be paid for their coffee to earn a living income. The Verified Living Income model calls for three priority shifts within the coffee industry:

1. Equalize power dynamics between buyers (traditionally “price-setters”) and producers (traditionally “price takers”);
2. Evolve procurement practices to directly address economic sustainability at origin;
3. Boost cooperation across the supply chain and invest in the future of coffee, ensuring that coffee production provides a dignified, self-sustaining livelihood for farmers.

“We all know and love the coffee these farmers produce, but people don’t realise the downward price spiral farmers are stuck in. Coffee can be a poverty trap, simply because the farmers who grow it are not paid adequately for their very valuable products,” said strategic initiatives manager: Coffee & Commodities at Heifer International, Cory Gilman. “We believe products like coffee are not sustainable unless they are tied to living incomes at origin. Coffee companies have a big opportunity to help end poverty in growing regions by paying verified living income prices, and our methodology shows it’s possible.”

To develop the Verified Living Income methodology, a pilot study was conducted in Tolima, Colombia with 38 smallholder farmers from the ASOPEP cooperative. Leveraging Heifer International’s extensive living income benchmarking expertise in the coffee industry and Sustainable Harvest’s deep producer relationships, origin staff, and expertise in the coffee industry for data collection, the pilot study showed that with an average cost of production of $1.33 per pound of green (unroasted) coffee, buyers would need to pay $1.89/lb. at the farmgate and $2.24/lb. Free on Board.

“The results of the Verified Living Income pilot programme highlight the need for further transparency and accountability across the coffee supply chain,” said cooperative manager at ASOPEP, Camilo Enciso Suarez. “Identifying the key factors that impact farm profitability is powerful, and pairing that knowledge with prices based on the true cost of production can transform farmers’ lives for the better.”

With cooperation from stakeholders at every level of the value chain, Verified Living Income can be a path to improve farmer livelihoods through alleviating economic instability in the coffee-growing regions and creating the value necessary for coffee production to be viable for farmers — today and for future generations.

“At Sustainable Harvest, our most fundamental belief is that the traditional coffee supply chain must change, and more value needs to shift toward coffee farmers. This has been our mission for nearly 25 years and Verified Living Income now provides an additional actionable standard that more roasters can adopt. The industry has a new opportunity to discover a Living Income price that can assure a sustainable supply chain for years to come; our role will be to help them navigate how to get there,” said director of sales at Sustainable Harvest, Monica Terveer.

“Verified Living Income marks a substantive change in the way the industry pays for green coffee. It is a truly transparent, economically viable method of determining how much to pay for green coffee, rooted in farmers’ livelihood needs,” said senior sustainability manager at Bellwether Coffee, Grayson Caldwell. “Committing to paying producers living income-based prices is not only a strategic investment, but also is foundational to a more sustainable and stable coffee industry. We call on the industry to join Bellwether in adopting the VLI pricing model and committing to paying living income-based pricing as a core procurement approach within their respective supply chains.”

The data from the Verified Living Income pilot indicated the need for Bellwether to increase the price paid to ASOPEP by 20%. In December 2020, Bellwether signed a contract with ASOPEP to reflect the Verified Living Income Price of $2.24 FOB. Bellwether has committed to implementing living income-based pricing throughout its supply chain, with the first milestone of all Latin American coffees targeted for completion by 2023.

To learn more about Verified Living Income, visit: verifiedlivingincome.com and download the Verified Living Income whitepaper for a step-by-step framework to implement the programme.

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