Blog post: Paying a fairer price to farmers

The idea is simple: by paying higher prices we could improve smallholder incomes, so that farmers and their households can afford life’s essentials. But how does it work in practice? For the past two years, we conducted a ground-breaking pilot study, in which we tested paying a premium directly from the retail stage to smallholder Basmati rice farmers in Pakistan to close their living income gap. Here are the key insights.

For many products globally, farmers often only receive 5-10% of the price consumers pay. This share has been shrinking over the past decades. Many farmers are unable to even cover the costs of farming, meaning they are actually losing money by producing the food we consume. And so, we asked ourselves: Is there a way to ensure that smallholder farmers – who are notoriously underpaid – receive their fair share?

The GRAISEA II programme implemented by Oxfam, was a perfect set up to try and answer that question. We saw smallholder Pakistani Basmati rice farmers struggling. At the same time, the programme brought together private sector partners at each stage of the value chain: the Pakistani exporter Galaxy Rice Mills and the Polish importer Rol-Ryz who in turn supplies the Norwegian wholesaler Unil and the Swedish retailer Axfood. GRAISEA was an ideal opportunity to test alternative commercial arrangements which would allow farmers to receive a fair share.

After the pilot was concluded, we published our report “Price Interventions as a part of living income strategies”. We also organised a webinar together with our private sector partners to talk about what we learnt. Our panel consisted of  Shahid Hussain Tarer, Director of Galaxy Rice Mills and Kristina Areskog Bjurling, Sustainability Manager at Axfood, and myself, Mira Alestig, Lead Researcher at Oxfam Sweden, under moderation of Uwe Gneiting, Senior Researcher at Oxfam America. We concluded that the pilot gave us many new insights, with both pros and cons with the unique setup tested. All arguably very valuable ones for future projects.

Missed the webinar? Don’t worry. Check out the recording below.

How did the pilot contribute to farmers earning a living income?

To pay a living income, you first have to figure out what a living income is and how farmers could reach it. And that’s exactly what we did as part of the pilot. We used a benchmark and analysed the living income situation of the Basmati rice farmers. We saw that smallholder Basmati rice farmers with farms that are below 10 acres faced a significant income gap from rice. Larger farmers, by contrast, already earned a living income.

Next, we looked at the interventions of GRAISEA. The programme supports Basmati rice farmers, amongst others, to farm according to standards of the Sustainable Rice Platform. This helps them to improve their yields. The programme also linked farmers directly with exporters like Galaxy to cut out exploitative practices of middlemen. This helps farmers to earn more as middlemen often charge high prices for their services.

But would this be sufficient to close their income gap? Our analysis showed: selling directly to exporters and improving yields made a significant difference, but not enough. Instead, a combination of yield improvements and an increase of the price farmers receive would be the most feasible route to closing the living income gap.

Then the burning question was: how can we support higher prices? Of course, private sector partners were worried about the costs. One challenge of paying higher prices is the fact that if the value chain actor closest to the farmers – in this case Galaxy – pays higher prices to the farmers, the price increase can escalate throughout the chain. This happens when all following actors in the value chain add a percentage to the price increase. At the end, the price increase could end up being much more costly than necessary.

So as a next step, we developed a new mechanism. It was based on the simple idea of redistributing a small share of the valued added from the actor furthest away from the farmers directly to the farmers. Why? Oxfam’s analysis showed that the actors at the top of the value chain – retailers and wholesalers – also keep the largest share of the price that consumers pay (see figure below). We saw that taking a small share from these actors would achieve significant increases in the share farmers receive, with no increase in the end retail price. We could cover the costs of the premium by simply distributing value more fairly.

We learnt that with just 1.5-3% of the retail price, you could make sure that the smallholder farmers reach a living income! And so a new mechanism was born that would transfer a premium – an amount paid on top of the regular market price – directly from the retailer/wholesale actor to the smallholder farmers.

You can learn more about the mechanism in our report ”Price Interventions as Part of Living Income Strategies”.

Is there a business case for paying higher prices to farmers?

While the moral case for higher prices to smallholder farmers is clear, it was great to hear Galaxy’s and Axfood’s reflections about the business case for it.

Galaxy’s motivation to join the pilot was of social nature to start with. But eventually, it turned into a business case – and such a strong one that Galaxy even decided to continue paying a premium after the pilot study was finished.

Hearing from Galaxy, smallholder farmers are more efficient than large scale farmers. But these are the ones that need support. So the logic was simple: if we support them, we can help them be more sustainable, get more direct and loyal relationships with farmers, while securing a stable and quality supply of rice for the future. This is key as 90% of rice worldwide is grown by smallholders. Galaxy reminded us that this also makes sense since having control over supply chains, traceability, and transparency, are now hot topics in the food industry.

Hearing from Axfood, their motivation was of social nature to start with as well. Axfood’s sustainability goals includes living income, and the pilot helped them gain practical knowledge on how to achieve it. Axfood also stressed that all supply chain actors had gotten better relationships thanks to the pilot. It established trust and enabled open discussions and dialogues about solutions as a result. And of course, it was valuable for Axfood to have increased traceability and transparency throughout the value chain.

Was the pilot a success?

The short answer: yes and no. On the one hand, we learned that paying a higher price, as a complement to other interventions, is a highly effective way to achieve a living income for farmers. Axfood and Unil paid a premium of 25-30% on top of the regular market price, which closed the living income gap from rice for the smallholder farmers in the pilot. Farmers appreciated the premium and used it to both cover their basic needs and invest in more sustainable farming practices. These were great results.

On the other hand, we also learned that paying a premium is complex and ran into some challenges when it came to the implementation – like calculating the premium, ensuring that smallholder farmers have access to the pilot and reaching women farmers.

But as moderator Uwe Gneiting reminded us, we usually have mixed results at the pilot stage, as these are complex and novel interventions. All challenges are outlined in our report “Price Interventions as a part of living income strategies”. In the report, I also give recommendations on how to overcome these challenges.

What was the biggest challenge?

Scalability. As much as we applaud private sector partners who embark on pilot projects to try something new, we need to move beyond pilot projects to really have an impact.

Hearing from Axfood, a big challenge was that the premium was not part of the normal business trade but was paid on the side by the retailer. To reach a relatively small number of farmers represented a large amount of work for Axfood. To Axfood, the most sustainable and scalable solution would be to integrate living income requirements into certifications like Rainforest Alliance or SRP in the case of rice. Certifications have the potential to reach more farmers.

At the same time, Axfood reminded us that most certifications today do not have a living income requirement. And retailers like Axfood will never be able to achieve certifications for all products and all tiers.

At Oxfam Sweden, we would agree. While certification schemes and assurance schemes such as SRP can indeed play a role in rising farmer incomes, this is not a sufficient solution. Companies have a responsibility to carry out human rights due diligence – meaning that they make sure that they don’t contribute to human rights risks in their value chain. Paying a living income falls within that responsibility. Outsourcing responsibility to certification schemes can never be a sufficient human rights due diligence approach. Not least since certified products make up only a fraction of the market.

The key question is therefore how companies can adapt their purchasing practices – including how prices are set – to enable a living income for farmers. This is not easy as the competitiveness on the market often is immense, and prices are pushed down till the limits. Axfood stressed that can be difficult for a single company to pay higher prices as consumers often prioritizes price, particularly in the current economic situation. Rather than transferring the costs for fairer prices to consumers, companies could also decide to cut their own margins. This can be difficult when margins for products are quite low – as in the case of rice. The large advantage of big retailers, however, is the massive number of products bought, which means they can play with their ‘margin mix’ of various products, including products with higher margins.

This is just one example but shows that there can be entry points for change. At Oxfam we remain optimistic that it is possible to align purchasing practices with living income and make fairer prices a part of the core business model of companies.


So what is next?

Axfood committed to buying only SRP rice for its own private label Garant. This is a big step forward. But since SRP currently does not include a living income requirement, Axfood aims to lobby SRP to do so.

Galaxy keeps paying a premium to farmers. The costs are covered by Galaxy itself. To make it commercially viable, Galaxy stressed the importance of tying a premium in with quality control and sustainable sourcing. To Galaxy, SRP plays a key role in this. SRP allows traceability and farmers to reach a better-quality product. There is also more and more interest from Galaxy’s customers in SRP rice.

At Oxfam Sweden, we aim to keep sharing our lessons and support companies in aligning their own purchasing practices and price setting with living income. Our conclusion is that a higher price to farmers needs to be a key part of living income strategies. It is possible to find alternative business arrangements that have the power to reach a living income for farmers. As long as we all accept that it sometimes can be complicated to be the first to try something novel and we keep learning, we can make change happen.

By: Mira Alestig, Lead Researcher Oxfam Sweden