Poverty has been a reality in supply chains for generations. An inadequate portion of the value generated by global commodities makes its way to the smallholder farmers producing cacao, coffee, vanilla and other commodities. As a result, many farmers are living in (extreme) poverty, unable to meet neither the daily needs of their household nor a decent living.
Closing the gap between what farming households earn and what’s needed for a living income is one of the biggest challenges facing farmers, governments, brands and traders. Every actor in the supply chain has a role to play in ensuring a more equitable distribution of value, through individual action and joint collaboration.
Recent events in the headlines threaten to make a living income even more difficult to achieve. Unexpected extreme weather events at the poles, rising production costs, and the knock-on effects of the invasion of Ukraine – increased food, oil and energy prices, limited availability of fertilizers, and capital stretched thin – all contribute to increasing income gaps.
There are two ways to view these challenges:
- The pessimistic view is to continue with business as usual. Companies may tighten belts, push sustainability efforts to the side, blame the market and current events, and focus inward to protect shareholder interests and the bottom line.
- The optimistic view is to open to collaboration and realize the opportunity that we, as a collective community in agriculture ecosystems, have to imagine (and create) what a sustainable agri-commodity sector could be.
At IDH, we choose the optimistic view, even if the course forward is not easy, especially when the ground under us is always shifting. Within this new reality, we must train our focus on key leverage points that have the potential to unlock the greatest transformation. Closing living income gaps is critical.
Mapping the way to living incomes
That’s why IDH developed a Living Income Roadmap that guides companies in what they can do to advance living income in their supply chains. While there are numerous actions that individual companies can take (e.g. shortening supply chains, service delivery and higher prices), the scale and scope of the living income challenge is too big to tackle alone for all farmer segments. Alongside individual actions, the Living Income Roadmap is set up to accelerate pre-competitive and multi-stakeholder collaboration.
Recently, IDH and Wageningen University & Research (WUR), along with the Roadmap Steering Committee¹ and the Living Income Community of Practice (LICOP), began a co-creation process to develop a multi-stakeholder framework for action to close living income gaps. Together, we are creating clarity on the roles and actions that each stakeholder group can undertake with farming families relative to the scale of the living income gap, from households that earn close to a living income to those with significant living income gaps.
This framework should trigger serious reflection and action for any stakeholder, both on what they can do themselves and in partnership with others. For example, in the case of families with the largest living income gap, no amount of margin sharing, yield improvement or otherwise could sufficiently close the gap. In this case, partnerships between the private and public sector will be key so that families can chart a clear course forward. This multi-stakeholder framework for action will be a key element in Step 4 of the Living Income Roadmap: Close the Gap & Track Progress. To date, we have organized a co-creation session with three stakeholder groups: traders and processors, brands and investors. As a group, we explored the roles that each group can play.
A focus on income drivers and actions
There are many approaches to closing living income gaps, but we focused first on the five main income drivers:
- land, from its productive use to how it is managed and owned
- costs of production
- production volumes
- price, including any premiums
- income from alternative sources
By focusing on these drivers, we anchor roles and actions in the areas that exert the most influence on smallholder farmer household income. Participants in the session were asked to think about where they could lead, influence and invest to have the most impact.
- Acknowledging and building on the interdependence of stakeholders – Every actor in the supply chain has an impact on how value is distributed in supply chains. Brands can take different types of actions, from changing procurement practices, to raising prices paid, to direct cash-transfers; enabling the re-distribution of value by working with their suppliers to benefit farming households. Traders and processors have a role to play in both ensuring that the additional value from brands reaches farming households, and by shortening supply chains to improve relationships and reduce transactions, all to support greater value retention for farming households. Producer country governments can level the playing field by setting differentials and premiums at the export/levels that brands have to abide by (or go beyond).
- Individual action by companies is important, but collaboration is key – In the case alternative sources of income, or income from diversified sources beyond the focus crop, service delivery could support goods beyond the focus crop. The challenge is ensuring that farmers have access to markets besides inputs, training and finance for alternative activities. Brands can work with traders on purchasing of multiple products from the same group of smallholder farmers. This can drive production and trade efficiency for companies and maximize income benefits for farming households. To drive further value, brands can invest in new product lines and/or promote the impact of strategic purchases among consumers.
- The need to think outside of your role – Traders and brands often feel that they have limited influence on land size, but are open to exploring how they could influence land use and land rights/tenure. For example, traders could support smallholder farmers through service delivery options that optimize production systems to ensure long-term sustainable production and healthy soils. Brands can co-invest in service delivery with their suppliers to offset some of these costs. Equity investors see opportunities to channel capital investment in solution providers to help clarify land ownership issues.
Based on the participation of stakeholders in the road map process and our reflections on the full set of learnings, we see a willingness and interest to look beyond existing roles and actions. And we know that action among stakeholders can catalyze, or unlock, more impactful and innovative actions.
We saw this potential take shape during the co-creation event when 45 impact investors endorsed the IDH Living Income Roadmap, encouraging their investees to shift their attention to the urgent need for living incomes.
As a next step, IDH and WUR, with support from our partners, will engage with more stakeholders and extend the circle to farmer organizations, governments from producing and consuming countries, NGOs and CSOs, and financial service providers. Key events, like the World Economic Forum at Davos, an IDH co-led Living Income Summit, and sessions organized by our strategic partner LICOP, will continue the momentum towards reflection and co-creation.
Join us at one of these upcoming events and check out Roadmap for Living Income to start your journey.
¹ Steering Committee Members include Mars, Nestlé, Nespresso, Ofi, Olam, Symrise, Touton, Unilever, and key strategic partners such as LICOP, BCTI and Farmer Income Lab