8 September 2022

Busting myths to reveal the reality around living incomes

For many farmers around the world, hard work does not necessarily result in a decent income. Volatile prices, the effects of climate change, rising production costs – all eat into potential income. Though a living income (at minimum) and a thriving farm sector is the goal, there are numerous misconceptions on the topic and how we get there.

For many farmers around the world, hard work does not necessarily result in a decent income. Volatile prices, the effects of climate change, rising production costs – all eat into potential income. Though a living income (at minimum) and a thriving farm sector is the goal, there are numerous misconceptions on the topic and how we get there.

A “living income” has a nice ring to it. Hard work and decent income should go hand-in-hand. But what if no matter how hard you work, you could never make ends meet? What if you had to choose between educating your children and putting food on the table? This is the reality for many farmers in global supply chains.

For example, it’s estimated that the average cocoa farming household in Côte d’Ivoire would need 6,134 euro annually to reach a living income. Unfortunately, only a fraction of cocoa farming households are within reach of that amount and the majority of cocoa farming households earn just 50% of it.

At IDH, we believe a living income is the result of:

Companies and farmer organizations operating efficiently and sharing risk and value fairly with farmers ;
Governments setting level playing fields for citizens, business and across borders; and
A financial sector that shifts the focus from shareholder returns to stakeholder returns.

It will require the collective action by every actor with a stake in farmer livelihoods. Achieving a living income is complex and requires large-scale systems change, not just production and quality improvements by farmers.

As the topic of living incomes takes on greater importance, we have seen a wide variety of approaches emerge, some effective, some less so. In this post, we’ll review a number of common misconceptions around improving farming households’ income and add nuance to the practical realities.

Farm size and ownership

Myth: Small-scale farmers just need to get bigger to produce more

Reality: Small farms require fewer resources and have the potential for strong productivity gains, whereas larger farms require a greater amount of resources to increase productivity.

An impact analysis from the Farm & Cooperative Investment Program found a negative correlation between farm size and yield with smaller farmers able to dedicate more time and resources into improving production.

By working with what they have, small farms have the capacity to increase production volumes and better manage costs and resources among income generating activities. This can increase income when done in concert with other stakeholders making services, information and markets available and paying decent prices.

Myth: A title to the land will resolve income problems

Reality: Formalizing land ownership is a powerful tool to incentivize farm investment and attract finance opportunities. But oftentimes, land formalization increases inequality among powerful and vulnerable groups, with those that already own land benefiting the most.

For example, in much of Africa, there are three types of land tenure, including private ownership, public or state-owned land, and community land or customary tenure. In some countries, farmland has been privatized to protect access to land and integrate smallholders into the market economy, but formalization of titles can also “solidify practices that negatively affect vulnerable groups…”.

Any efforts to formalize land ownership must factor in the interests of marginalized groups, including women, youth, ethnic minorities or land-users that do not own land. Other alternatives include strengthening communal land rights or block farming practices where farmers collectively or individually own land and collaborate to improve practices.

Volumes and cost of production

Myth: Better quality and increased production will increase income

Reality: Increases in productivity and quality can serve individual farms, but scaling this approach often results in oversupply, which reduces prices and delivers zero net gain or even losses for farming households. In general, and over time, higher quality and larger-scale production benefit buyers and consumers more than farmers.

A living income study in the Colombian coffee sector found that most smallholder farmers face an insurmountable living income gap that cannot be solved with technical assistance to improve production alone. In cocoa, yield gaps are often large and represent a ”quick win”.

But ultimately, unless prices and aggregate supply are managed, and/or farming households have access to legitimate opportunities for income diversification, income will not increase.

Myth: Greater productivity reduces pressure on the land and increases income

Reality: The reasoning here is that if farmers are able to increase productivity on the land they have, they’ll earn more and be less likely to expand their farm into sensitive areas, such as forests.

Research shows that incentives to increase production can actually lead to increased deforestation as short-term income gains can incentivize land conversion from forest to production areas. Additionally, if productivity improvements prioritize crop intensification, it can negatively affect long-term soil health and biodiversity, which can reduce productivity in the long-term and further incentivize land conversion. Moreover, support for productivity and quality often lead to greater dependence on the focus crop, leaving farmers heavily indebted and unable to recoup investment costs.

As with many of the other myths, we see that additional interventions around price, income diversification, and intentional environmental conservation, are needed for long-term productivity and environmental conservation.

Price discovery and assigning value

Myth : Commodity and financial markets are the optimal mechanisms for price discovery

Reality: We often treat the market pricing mechanisms as neutral way to assign value and find balance between supply and demand. It’s also often assumed that all market actors are able to respond appropriately to market signals. In reality, market instruments aggregate supply and demand data without incorporating farm realities, such as cost of production or living income gaps. This leads to price volatility with farmers ultimately bearing the greatest losses and risk as they often lack opportunities or information that enable effective price negotiation and risk management.

There are other options for price discovery and assigning product value. For example, certifiers are integrating living income gaps into certified pricing schemes; governments like Cote d’Ivoire and Ghana are installing living income price differentials; and industry and academic institutes are making transaction data more transparent with the goal of sharing pricing data back with farmers and farmer groups, such as in the Specialty Coffee Transaction Guide.

Myth: Paying higher prices is the only way to solve inequality and resolve living income challenges

Reality: For cash crops, most consumer prices have steadily risen over the past decades, yet the nominal price farmers receive has declined. Price increases are within the direct sphere of control of downstream buyers, and this would result in more income for all farmers in traceable supply chains with verified payments to producers.

Yet downsides exist. Higher prices could induce oversupply or expansion into fragile ecosystems. And price increases favor farmers with larger and/or higher producing farms, limiting the impact for farmers with smaller parcels and less productive land, who are the majority.

Ultimately, there is no replacement for a stable price that accurately reflects costs of production, adequately rewards labor enables risk management. With a measure of assurance and more transparent trade relationships, and national and/or sector-level supply management, farmers can better plan for the future.

Diversifying household income

Myth: Income diversification is the best way to improve household income

Reality: Overreliance on any one crop can lead to disastrous results. According to research from Fairtrade and True Price in Côte d’Ivoire, cocoa represents 74% of household income for cocoa farmers. In Colombia, coffee represents 70-90% of all household income. Diversification provides a tidy solution that allows farmers to spread risk across a variety of income generators.

In principle, this approach works great, but diversification isn’t as easy as it sounds. Increasing income from products outside of a farm’s focus crop requires sufficient demand, time and input. When opportunities exist, diversification can reduce dependency on the focus crop, but it increases management complexity and requires more resources and training. In some contexts, market development and new trade and investment strategies are required to enable income diversification. Before strategizing on income diversification, optimizing for a farm’s focus crop is preferable.

Bonus Myth: Challenges around income are so complex, there is nothing companies can do to help

Reality: Each of the myths listed above contain a kernel of truth. Higher prices, greater productivity, land tenure, better procurement practices, and diversification strategies can all contribute to better incomes. But none of them provides a complete solution, especially if we want equitable results that extend to all households and the environment.

The prevailing response to living income gaps by industry and development partners to date has been to focus on helping farmers increase the productivity and quality of their crops. This ideally would lead to a mutually beneficial exchange that remunerates all parties equitably. However, this has more often resulted in increased production costs for marginal increases in income with a living income still out of reach. We now know that much more is needed to change the system.

Systems change will require that every supply chain actor, government, financial institution and other stakeholder takes ownership of their sphere of control and influence, and takes actions and makes investments where needed.

Systems change will require that every supply chain actor, government, financial institution and other stakeholder takes ownership of their sphere of control and influence, and takes actions and makes investments where needed. This could be through partnerships and information-sharing with the goal of creating a market system and enabling environment where a living income is possible.

Our recent Living Income Summit brought together 140 multi-sector stakeholders committed to addressing the challenges around living incomes and yielded a variety of important insights and actions that need to be taken. IDH is also supporting sector specific activities, including the ISCO Conference in cocoa, and the CEO & Global Leaders Forum for coffee in Colombia (hosted by ICO). Bringing stakeholders together to learn from each other and find pathways for collective action is key for the future.

Interested in learning you how you can take action on living income? Check out the Living Income Roadmap and begin the journey today.

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