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Return on household labour: a means to accelerate the path to a living income for smallholder coffee farming households
Many stakeholders have ambitions to reduce smallholder commodity farmer poverty and for such households to earn a living or prosperous income. The concept of a living income, which means that households earn enough to afford a decent standard of living, has gained traction in the past decade, among companies, NGOs, and governments including the EU, Dutch, German, Belgian, and Luxembourg governments.
In various sectors, including the coffee sector, stakeholders have identified ambitions and targets for smallholder farming households to achieve a living income, which is a milestone on the way to a prosperous income. This has led to the innovation of approaches to reduce or close living income gaps compared to more traditional farmer training and input supply approaches, examples being paying cash transfers to households at scale, paying a Living Income Reference Price or a True Price, and implementing landscape approaches in which also income diversification is addressed. Such new approaches are needed as a large proportion of smallholder coffee farming households, and the workers they employ, continue to be poor, with many earning less than the World Bank extreme poverty line.
Even while coffee and cocoa futures market prices are skyrocketing, likely increasing farming household incomes, the root causes of poverty need to be addressed for long-term resilience.
Currently coffee futures market prices are skyrocketing, with arabica prices doubling in value since September 2023 and a similar trend for robusta. Such high futures market prices likely increase coffee farmgate prices and therefore farming household incomes. This is a good development for such households, as most of the coffee farming households earn far from a living income; any increase in income is meaningful for them. Despite these higher prices, many of the root causes of poverty still need to be addressed to achieve long term coffee farming household and sector resilience. This includes finding ways how to avoid the market price to starkly decrease again, which has happened in the past. Similar trends are observed for the cocoa sector.
More needed in addition to the currently high futures prices to lift smallholders out of poverty
Even with the current high futures and therefore likely also higher farmgate prices, many households do not earn a living or prosperous income; support therefore continues to be needed still needed to increase both coffee income and non-coffee income.
It is important to address the return to household labour and demand for labour in designing living income pathways for farming households in commodity sectors.
Various stakeholders have established milestones for farming households to achieving a living or prosperous income, and are developing innovations to increase yields and quality, support the implementation of good agricultural and climate smart practices and agroforestry, and increase income. However, two aspects of farming and economic development are often forgotten in discussions on how to support farming households: 1) what the financial return to (household) labour is for different activities, and how this return compares with the living income benchmark per working day, and 2) how farming households allocate the time adults have available for work in connection with the demand for labour. This while more investments in the farm in terms of inputs and labourand more opportunities for earning an income beyond farming are associated with higher household income.
New metric: the living income benchmark per working day
This benchmark is calculated by dividing the household specific yearly Living Income Benchmark by the total number of working days that adults in a household have available for work in that year. Households therefore earn a living income if: i) their daily net income per working day is the same or more than this living income benchmark per working day, and ii) if they work all the days they have available for work in that year
Huge income differences between households within and between Kenya and Vietnam
New analyses using data from already existing datasets show that coffee farming households in Vietnam are much better situated than households in Kenya in the 2020 and 2020/2021 coffee season, in terms of the share of households earning a living income (45% in Vietnam and 9% in Kenya). Factors explaining this difference are that farm size in Vietnam is small, but much larger than in Kenya (1.1 ha compared to 0.7ha) and coffee yield is also much higher (2,200 GBE compared to 500 in Kenya).
The farmgate price households received was quite similar, despite differences in coffee variety (Robusta in Vietnam and Arabica in Kenya). Per hectare, the cost of production was similar, but because of the higher gross income from coffee, coffee profitability was much higher in Vietnam than in Kenya. In both countries, farming households spent a relatively low proportion of time on coffee production (34% in Vietnam and 22% in Kenya) compared to their coffee income share (86% and 46%). This while labour investments are correlated with income and yields are low in Kenya.
Relatively high incomes and returns to household labour are possible – we need to learn from the top performers and about challenges for other households to increase their income substantially
A small group of households (10-20%) is performing well, while the majority is performing very poorly in Kenya. And Vietnamese households perform much better than Kenyan households. Therefore we conclude that it is important to learn from both groups of top performers as well as about the challenges encountered by households earning far from a living income, to inspire effective intervention design.
The possibility and need to increase return to household labour and address hidden unemployment in coffee production areas in policy and intervention design
There is large variety in the return on household labour for coffee production; the best performing Kenyan farmers are earning almost the same per day as the best performing Vietnamese households, though the Vietnamese perform much better on average. This means there is much room for improvement, especially in Kenya. Households not meeting the living income benchmark per working day threshold (about 11-12 USD/day) through coffee earn less than one third of what is needed per day. 89% and 23% of the households in Vietnam and Kenya meet the living income per working day threshold. In addition, households in both countries spend a low proportion of the time that adult household members have available for work on coffee-production activities.
We infer from our analyses that many poor farmers have challenges finding meaningful income opportunities outside coffee production and that hidden unemployment seems an important challenge for these rural households. Offering farmers other economic opportunities that are equally or more remunerative than coffee is essential on the journey to a Living Income.
The value of the return to household labour concept
The return on household labour concept is a useful addition to analyses and discussions on living incomes as it generates insights on labour productivity and allocation, including hidden unemployment. Such insights can be used for effective policy and intervention design. In this way, farming and household realities can be better embraced to support closing the return on household labour gap.
The need to discuss and assess what the ‘fair share’ of companies and governments is in closing living income gaps of different types of farming households
Currently two methodologies exist for establishing farm-gate prices that should be paid, for companies and other stakeholders such as governments to contribute their ‘fair share’ to reducing and closing living income gaps: the Living Income Reference Price developed by Fair Trade and the True Price Living Income Module. Using such methodologies for defining the role of different parties in closing living income gaps has especially become important in the light of the new CSDDD EU regulation.
Applying these methodologies shows the need for a huge increase in the farmgate price. If we calculate the True farmgate Price based on the Living Income Module for Kenya, the theoretical farm-gate price is 6 times higher than the farm-gate price in the year of our study (2020) and about 2.2 times the early 2024 farm-gate price of USD 3.64/kg. Paying the True Price based on the Living Income Module would lead to 96% of Kenyan households in our sample meeting the living income benchmark per working day through coffee, and 53% would earn a living income. So even with such high farmgate prices, still not all households would earn a living income, let alone a prosperous income. Therefore, it is still important to work on farming efficiency and income opportunities to keep supporting farmers in earning more.
High farmgate prices do not ensure all households to earn a living income; living income targets may lead to the exclusion of the poorest households
If such high farmgate prices would be paid at scale, the total sourcing costs would increase by a factor 6, while almost half the households would still not earn a living income. Questions are therefore on how the funds could become available to pay such high farmgate prices at scale, and also how different actors such as for instance governments can contribute to close living income gaps. This ‘fair share discussion’ is also important for discussions in the sectors on how to avoid exclusion of the poorest households from supply chains, when inadequate company or multistakeholder targets are set on a certain proportion of households to earn a living income in the near future.
There is a risk of exclusion of the poorest, if companies are asked to ensure the coffee they source comes from households earning a living income. Our data shows that coffee farming households earning a living income (per working day) produce much larger volumes than those that do not meet such a threshold; a trend that we can see both within and across producer countries. As such, procuring “living income coffee” seems less a commercial (read volume), but more an ethical problem for the coffee sector. Both private and public actors will need to re-think how to support these most vulnerable ‘low volume’ farming households.