If you’ve been in your local coffee shop recently, you might have found yourself with sticker shock at the current price of coffee drinks. Despite all‑time high prices at the retail level, an estimated 80% of the 12 million coffee producers around the world still live below the poverty line. The fact is: there is currently no mechanism for connecting the price you pay at the coffee shop with the price farmers receive for their coffee. This disconnect creates unequal value distribution across the coffee supply chain that continues to escalate a poverty crisis in farming communities.
The price that farmers are paid for green coffee is currently based on the International Commodity Exchange (or C‑market) which determines prices based on the worldwide supply and demand of coffee instead of what it costs the farmer to produce that coffee. This means that the price per pound that farmers receive is set by forces that are completely divorced from the cost of production, often causing losses for farmers and unpredictable swings that keep farmers in a state of economic instability. This pricing mechanism means that any supply chain shock in a particular origin will impact all producers worldwide. For example, in 2021, an unprecedented frost in Brazil devastated crops there, dropping the global coffee supply dramatically. This created a contraction in the supply chain which temporarily drove prices up in the C‑market, creating positive economic benefits for producers worldwide. Conversely, a country that contributes unexpectedly high volumes of coffee to the market, as has happened when new coffee producing countries like China and Vietnam begin to surge, that increased global production will create a supply chain expansion, driving down the C‑market price and negatively affecting farmers who will likely take a loss on their coffee as a result, regardless of what they spent growing and harvesting their own crop.
Certification bodies like Fairtrade and Rainforest Alliance were created to mitigate the volatility in the C‑market and increase prices for farmers to offset the impacts of low market prices and high costs of production. The programs have made great strides over the past few decades in establishing minimum price standards for producers. Unfortunately, even with recent increases in the current minimum price, the current interventions of the“Trades”—Fairtrade, Fair Trade, or Direct Trade—don’t go far enough to truly support the long‑term economic health of producers and have not significantly changed the poverty quotient of farmers worldwide.
Fairtrade International, for example, just increased minimum prices for the first time in a decade, meaning producers have had to bear the increased costs of production and impacts of inflation without receiving increased compensation, all while the price of retail coffee continues to climb.
On top of low prices, farmers face a shocking number of additional challenges—climate change is bringing more erratic weather patterns to farms, making growing and harvesting less predictable and more risky, new plant diseases and spreading pests are affecting crop yields and are even forcing farmers to move further up the mountain to a higher elevation to continue producing, a move not feasible or realistic on a large scale as climate‑related coffee diseases spread. Visiting producing countries like Guatemala, it is starkly apparent that coffee farmers are leaving the industry altogether with abandoned farms lining the highway, as producers migrate to the United States seeking better opportunities.
And let’s not forget—we are still on the heels of COVID which disproportionately affected farmers around the world who saw a categorical increase in their production costs. From an increase in labor as borders and communities closed to mitigate the spread of COVID, causing a major spike in the cost to hire the necessary seasonal labors required for harvest. The war on Ukraine exacerbated the COVID cost of production spikes as the cost of oil sent the price of fertilizer skyrocketing—as high as 300% in certain origins—making it impossible for market prices to even begin to match the cost to produce coffee around the world.
The rising costs of production, coupled with the aforementioned challenges, have made it hard for coffee to be a profitable business, even when the C‑market is high. Historically, coffee producing families have been able to pass farms along generationally and keep families on their land as long as possible, but the lack of financial stability in coffee combined with the pull of migration to America, many young generations of future coffee farmers are leaving the farm and their countries, creating a looming crisis as existing farmers age into retirement. The average age of a coffee producer is currently 60 years old—which should be alarming to everyone.
At Bellwether, we recognized that the current way that pricing is set is placing an unjust burden on the very backbone of the industry that we rely on. As part of our mission to create the sustainable future of coffee, we believe we must work to change the way farmers get paid in a revolutionary way in order to interrupt farmer poverty and create economic stability in the coffeelands.
Introducing Living Income Pricing
Living Income Pricing is a new pricing methodology that establishes origin‑specific minimum prices that farmers require in order to close the living income gap.
This new pricing mechanism establishes minimum prices based on farmers’ livelihood needs and the cost of coffee production, rather than an outside market based on supply and demand. To establish a minimum price, Bellwether and its partners across the supply chain collect data on cost of production, land size, and productivity level, which is analyzed over a full harvest cycle. We then overlay this data with a Living Income Benchmark established for a particular coffee growing region to determine the minimum price that needs to be paid.
A Living Income Benchmark is defined as the annual income required to afford a decent standard of living for all members of a household—once costs of producing coffee are covered. A decent standard of living includes: a nutritious, culturally‑appropriate diet; decent housing based on local needs and expectations; the cost of other basic needs, like healthcare, transportation, clothing, and education; and minimum savings to withstand unexpected shocks and expenses.