Making the price right: Living income and new-look pricing models in the coffee sector

living income coffee

With coffee prices still falling below production costs in many countries, GCR looks at how new pricing models can increase emphasis on the farmer’s living income and share of the profits.

Despite a growing global coffee market valued at US$465.9 billion in 2020 – according to Azoth Analytics – year after year, prices paid to coffee farmers continue to stagnate, if not decline.

“Coffee producers are the backbone of the industry we all work in, but we’ve seen for decades that producers aren’t being paid enough,” says Grayson Caldwell, Senior Sustainability Manager for Bellwether Coffee.

“Coffee is a multi-billion-dollar industry and while there have been calls for higher prices, there’s been no substantial change to how producers are being paid. This has caused prices paid to producers to decline 67 per cent in real terms.”

Bellwether Coffee produces low-emission commercial coffee roasters that allow its customers to roast instore and onsite. The company has also established an online green marketplace, where its customers can purchase green coffee from a list that Bellwether curates.

When Caldwell joined the team in late-2019, despite Bellwether Coffee’s efforts to use best practices to purchase coffee sustainably, she found a flaw with the way the industry approaches ethical coffee buying.

“As a company, we purchased coffee with buying principles that emulated industry standards, working with value-aligned coffee importers, travelling to origins, and building relationships with producers,” Caldwell says.

Grayson Caldwell is the Senior Sustainability Manager for Bellwether Coffee.

“We purchased coffee with a gut level reasoning that we were paying fair prices. But there wasn’t any actual data to back that up. Bellwether Coffee is an advocate for farmer equity and wants to pay fair prices to coffee producers, so it was important to back that up.”

To ensure the validity of its buying practices, Bellwether Coffee began working with coffee trader Sustainable Harvest and development organisation Heifer International to develop a new pricing model, Verified Living Income, to meet coffee farmers’ livelihood needs.

A living income is the amount of money a family needs to ensure a decent standard of living in a particular area. This includes a nutritious diet, adequate housing, basic needs like education and healthcare, and savings for unexpected costs and events.

To develop the Verified Living Income methodology, a pilot study was conducted with 38 smallholders from the Association of Ecological Producers of Planadas (ASOPEP) cooperative in Colombia.

“The model takes the cost of production for a particular cooperative or group of producers, looking at how much they spend on labour, transportation, processing, and all their other expenses, and overlays a living income benchmark for that particular area. It then divides that by the size of farm, yield, or productivity level to determine the necessary pricing,” Caldwell says.

“Completing a pilot study was critical to developing this model so we could understand the crucial metrics of cost of production. We spent over a year working with ASOPEP to collect cost of production data, covering the two harvests that year, which the cooperative had never actually done in the past.”

The pilot study showed that, with an average cost of production of US$1.33 per pound of green coffee, buyers would need to pay ASOPEP US$1.89 per pound at the farmgate and US$2.24 per pound Free on Board to achieve a living income for farmers.

The pilot study showed that, although Bellwether thought it had been paying a fair price to ASOPEP, a 20 per cent increase was required. The day Bellwether finished analysing the data, Caldwell says the company signed its 2021 contract with ASOPEP, meeting the new benchmark.

“The cooperative manager Camilo said it was the first time a buyer had asked him if they could pay them more,” she says. “Living income is not a new concept, but this is the first contract in the coffee industry signed based on living income pricing.”

With the living income differing from producer to producer, region to region, and country to country, Caldwell says the pilot study has allowed them to develop a tool to measure it with every producer Bellwether Coffee works with. The company aims to pay a verified living income across all of its supply chains in Latin America by 2023. She adds the wider coffee industry can also take advantage of the now clear methodology.

“If we don’t pay coffee producers fair wages, we’re going to see more farmers leaving the coffee industry all together,” Caldwell says.

“It’s hard work and time consuming, but the pilot shows it is possible to determine and pay a living income.”

In the United Kingdom, the International Trade Centre (ITC) has launched a different business model where the profits of coffee farmers are also put first.

Farm to Home is a consumer-focused eCommerce website where profits from the sale of coffee go directly back to the farmers. 

Sensible Development was commissioned to develop the platform. Managing Director Alan Newman tells Global Coffee Report the key to Farm to Coffee is that farmers maintain possession of the coffee until the final point of sale.

“Under normal circumstances, a trader or roaster would buy coffee from the farmer at a set price, then take care of the shipping, roasting, and taking it to market. They take on the risk, but benefit from all of the profits,” Newman says.

“In this model, we’re not buying the coffee from the farmer. They receive the profit of the sale, rather than being paid according to how we value the green coffee. It means the farmers are sharing some of the risk but are getting all of the rewards.”

The ITC has selected a handful of producers and cooperatives in Ethiopia, Tanzania, Uganda, and Burundi for the initial phase of Farm to Home. The agency pre-finances coffee after it has left the farm, then organises shipping, storage, and contract roasting of the coffee.

Sensible Development, which primarily works in online private auctions, developed the platform, packaging design, marketing, and messaging around the coffee. It also handles the end transaction through the platform, then passes that money back to the producer.

“The coffee is sold on the basis of the farmer receiving the profits of all the value addition introduced throughout the supply chain,” Newman says.

“In theory, this will see their income rise and they’ll be able to reinvest in their coffee farming and the quality of life of their families and employees.”

Newman says by receiving the retail price for their coffee, farmers stand to earn 10 times more profit for their coffee than they would at the farm gate.

“The challenge will be to educate more people on the reality of the supply chain,” he says.

“It appeals to a certain type of buyer that is invested in the idea of farmers being rewarded. In the traditional sense, the farmer has already sold their coffee. The advantage to the consumer here is they know they’re paying the farmers directly, at a sustainable and ethical rate for that coffee.” 

Farm to Home is still in its infancy, though Newman sees great potential in expanding its reach beyond the UK and in other channels, such as wholesale to cafés, physical retail in ethically minded supermarkets, and through other online operations like Amazon.

“There are a lot of people selling coffee online and it’s very competitive. But with COVID-19, people are drinking more coffee at home and ordering it online, so it’s a good channel to grow in,” Newman says.

“The trick will be achieving mass adoption, building a base of customers, by sharing the message that Farm to Home is a great way of buying coffee that actually helps farmers.”

As Farm to Home grows, Newman says it could provide farmers more opportunities to claim greater autonomy over their coffee and inspire other businesses to take up similar models.

“I can see a platform like Farm to Home catching on the coffee industry, being of particular interest to a lot of producers who like the idea of potentially controlling the income or price for their coffee,” Newman says.

“If something works and becomes commercially viable, all of its competitors will begin to look at the way they do business. Like B Corp and Fairtrade certifications, or other established markers of ethical business, if a company sees the benefit, they see a reason to get involved.”

There’s a myriad of factors affecting coffee producers, from climate changes and increased production costs to COVID-19 fallout and shocks like back-to-back hurricanes in Central America in 2020.

As such, Bellwether Coffee’s Caldwell says implementing farmer-centric and living-income-based pricing models could stabilise the coffee industry for years to come.

“Farmer-centric pricing shifts the power dynamic within the coffee industry. It levels the playing field, so a cooperative or producer understands the value of the product they’re selling and can be better negotiators when signing contracts,” Caldwell says.

“Sustainable buying principles without data isn’t going far enough. As an industry, we need the proof to back up our buying decisions.”

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This article appeared in the July/August 2021 edition of Global Coffee Report, read more HERE

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