The coffee industry has an enduring poverty crisis that, despite decades of various interventions and initiatives, doesn’t seem to be letting up—at least, not at scale. As many as 80% of the world’s coffee producers live below the poverty line, and farmers receive significantly less money per pound of coffee than they did thirty years ago.
Our existing standards for pricing coffee don’t work for farmers. It’s past-time to try something new.
We partnered with stakeholders across the supply chain to develop a new methodology for pricing green coffee that’s based on real-world living income benchmark data.
Verified Living Income (VLI) is a context-specific methodology for determining minimum green coffee prices based on the coffee farmers’ livelihood needs in a local area.
The implications of this methodology are significant, so in this article, we’re breaking down the methodology, pilot study, and results. We’ll cover things like:
- How VLI is different from existing pricing structures
- Why meeting the cost of production doesn’t come close to a truly sustainable price
- Next steps for coffee companies who want to live out their values
For complete details on the study methodology, limitations, and recommendations for determining a Verified Living Income in new contexts, see the VLI Whitepaper.
What is Verified Living Income?
Existing pricing structures are generally based on supply and demand (C-market), the cost of production, or a guaranteed minimum price.
Verified Living Income focuses on what it takes to make coffee economically viable for the people behind the farms by closing the living income gap. The context-specific living income data makes VLI the first truly farmer-centric and economically ethical way to source coffee that is firmly grounded in realities at origin.
We partnered with organizations across the supply chain to run a pilot study with a cooperative located in Tolima, Colombia. Our partners included: Heifer International, Sustainable Harvest, The Latin American and Caribbean Network of Fair Trade Small Producers and Workers (CLAC), and the Asociación de Productores Agropecuarios de Café Especial de Planadas (ASOPEP).
Here’s how it works: data on the cost of production, land size, and farm productivity is collected with the help of stakeholders throughout the supply chain, then overlaid with the local Living Income Benchmark to identify the minimum price that should be paid for green coffee to achieve a price that enables producers to thrive, not just survive.
Heifer International is the non-profit behind the Living Income Benchmark metric. Their award-winning methodology helps projects like this use accurate local data to identify fair costs for all kinds of agricultural goods.
Some of the inputs for the Living Income Benchmark include:
- Nutritious, culturally-appropriate diet
- Decent housing based on local needs and expectations
- The cost of other basic needs, like healthcare, transportation, clothing, and education
- Minimum savings to withstand unexpected shocks and expenses
The result is a green coffee price that’s fair and sustainable for producers over the long-term, and doesn’t rely on philanthropic projects, charity, or other initiatives that fail to tackle the root problem of under-priced coffee.
There are a few key differences to other pricing methodologies:
- It’s completely decoupled from financial markets. Supply and demand are not part of the price discovery process. The C-market is disregarded completely.
- Living income or bust. The entire methodology is based around providing a local living income. If we’re not doing at least that, we’re still perpetuating the structures that keep millions in poverty.
- Giving producers agency to determine their future. Producers must be part of the process to evaluate costs of production, which elevates business acumen and offers an opportunity for meaningful inclusion in the price-setting process.
The resulting Verified Living Income price can only be applied to settings where the data is collected from. In other words, it’s a process that must occur for every partner cooperative and refreshed every few years to ensure the price remains reflective of a true living income.
Results from The Pilot Study: Tolima, Colombia
We worked with 38 smallholder farmers—all members of the cooperative ASOPEP in Tolima, Colombia—and partner organizations to discover a context-specific VLI price based on the following averages.
Note: The farmgate price represents the money producers receive at the “farm’s gate” for the sale of product before additional transportation, milling, processing, warehousing, and other costs. FOB contract prices roll up all those extra expenses. For this reason, we suggest focusing on the farmgate price as the more transparent measure of what producers receive.
|Averages for the Sample Size|
|Local Annual Living Income Benchmark||$4,464 per person|
|Farm Size||3.43 hectares|
|Coffee Yield||2,883 lbs per hectare|
|Production Cost Per Hectare||$3,045|
|Production Cost Per Pound (Farmgate, dry parchment)||$1.06|
|Production Cost Per Pound (Farmgate, green equivalent)||$1.33|
When we overlaid all the data, we were able to identify VLI prices for three coffee buying scenarios.
|Verified Living Income Outcome: ASOPEP Speciality|
|Farmgate Price (dry parchment)||$1.51|
|Farmgate Price (green equivalent)||$1.89|
This VLI pilot study concluded that the farmers of this particular cooperative need to be paid $1.89 per pound of green coffee to achieve the local Living Income Benchmark with coffee as their sole source of income (true sustainability).
Bellwether Coffee’s Response: We Paid More
To our surprise, the Bellwether Coffee 2020 contract with ASOPEP—which we previously believed to be fairly priced (and Certified Fair Trade)—fell below the VLI price. To live out our values of a company that pursues true sustainability, we signed a new contract for 2021 representing a 20% price increase from the previous year’s to reach the Verified Living Income price.
We’re committed to following the Verified Living Income methodology for all of our producer partnerships in the future, with all partnerships in Latin American achieving a VLI price agreement by the end of 2022.
Another Benefit: Encouraging Producer Agency
One benefit of this process was giving the producers of ASOPEP the agency to participate in the price-setting process. The power dynamics of most buyer-producer relationships leave coffee farmers as “price takers” and the buyers as “price setters”. This unbalanced dynamic is a key driver of future instability, because it leaves many producers around the world vulnerable to hardship and discourages younger generations from investing in the industry.
By partnering with them to collect the necessary data on the costs of production, we witnessed farmers expand their business acumen, learn to collect and use financial data, and take ownership over their businesses in new ways that will empower them for years to come.
Implications for The Greater Coffee Industry
This pilot study confirmed that existing pricing structures for green coffee are woefully inadequate to combat the trend of unsustainability in our industry.
Until all green coffee buying starts with living income as the baseline for pricing—rather than the C-market or other global minimums—the imbalance of value in the coffee chain will not be corrected.
To create a more fair and sustainable industry, producer livelihood must be the starting point for green coffee prices. Buyers can no longer be “price setters” and producers “price takers”. This will require cooperation from stakeholders at every level of the value chain—and it can be done.
We strongly urge players across the industry to consider these recommendations:
- For Farmers — Consider financial management a necessary step to prosperity. Track and analyze expenses and returns, then benchmark them against household needs.
- For Cooperatives — Provide financial management tools to members. Support farm-level cost analysis to inform better collective bargaining. Utilize data analysis to determine necessary areas of investment. Determine and leverage VLI as a key price negotiating element in sales contracts.
- For Importers — Provide full transparency in all contracts and educate roasters on how FOB prices translate to farmgate prices and household income. Cultivate business acumen at the cooperative level. Build long-term relationships to minimize market uncertainty. Focus on collaborative decision-making for supporting farm improvements.
- For Roasters — Use farmgate prices as the starting point to set FOB prices. Embed farmer profitability into procurement. Make living income a core objective in sustainability commitments, backed by accountability. Eliminate arbitrary marketing language like “fair” and “ethical” unless clearly defined and measured.
- For Organizations — Incorporate living income as a key to development. Require purchase contracts as part of corporate projects with VLI-based price discovery as a prerequisite. Facilitate tracking of long-term costs of production as a standard farm management practice. Support collective bargaining through capacity building training.
We invite all stakeholders across the supply chain to pursue a truly sustainable green coffee trade by adopting and helping us improve the Verified Living Income methodology. A better, fairer industry is possible—we can get there together.
Want to dive into the details? Download the VLI Whitepaper.