There is a clear incentive for businesses dependent on smallholder

farmer production to ensure smallholders have a business case for

investing in farm production. An obvious entry point is the revenue side
of the farm business. Buyers must ensure farmers are paid rewarding
farmgate prices, regardless of where the company is situated in the
supply chain, to motivate farmers to continue producing and trading in
their supply chain.

As brought forward in an earlier opinion article ‘Real talk: prices and

profits for all businesses’, improving sourcing relationships and
practices has many benefits to food, beverage and textiles companies.
Only, how can we make this work when farmgate prices are influenced
by market pricing mechanisms such as commodity exchanges and
minimum price regulations?

Below we offer 3 entry-points for companies to deliver higher and stable

farmgate prices by factoring in value and risk in sourcing decisions.

1. Re-distribute value

Higher farmgate prices can be achieved through a fairer allocation of

value across the supply chain channelled through higher farmgate
prices, compensation for unrecognised value creation, and upstream
investments. But what is a fair allocation of value to farmers? And don’t
we rely on the market to determine that price based on supply and
demand?

In short, traditional price discovery and price-setting practices need

reimagining.

With variation across products and supply chains, farmgate prices are
often de-linked from physical realities like cost of production and are
influenced by trading mechanisms and financial speculation rather than
physical trade.

Cost-plus and open-book pricing is a price discovery and price setting

approach where buyers pay a price that covers the cost of production
and a margin on a product. These are not novel pricing strategies in
business practice; but in food, beverage and textile supply chains it is
up to buyers to offer this option since smallholders are highly
fragmented price takers. Multiple businesses do this already: food,
textile and FMCG retailer Costco is doing so in their San Francisco Bay
Coffee sourcing program as are respective clothing, dairy and chocolate
brands Everlane, Danone and Tony’s Chocolonely, to name a few. The
latter company actually offers multiple price premia to cover sustainable
production, costs of living, and producer group management fees – all
costs they utilise in their price discovery and setting practices.

Additional compensation, for example for farmer-centric marketing

materials and farmer-delivered ecosystem services, can also be paid.
Any price increase or additional compensation should be verified to
ensure the full increase in price is received at farmgate rather than
leaked across intermediaries. In traceable, short and/or digitised supply
chains, direct payments to farmers may be possible even by brands and
retailers.

2. Prioritise maximum price delivery at farmgate

Sometimes farmers can’t secure the maximum farmgate price available.

Reasons for this range from long and opaque supply chains to
information and resource deficiencies in production contexts, and even
unscrupulous and untransparent behaviour of their direct buyers.

All procurement departments, especially those operating at origin, can

commit to shorten supply chains and prioritize direct trade with
farmers so fewer intermediaries share the total export and end-product
value. This should translate into higher farmgate prices. More direct
trade with farmers enables better relationships and information
exchange between parties, increasing opportunities for smallholders to
change their production, storage and/or processing procedures to
deliver their produce in accordance with different quality and product
specifications to reach the highest available farmgat e price.

Transparency and consistency in transactions with smallholders is also

crucial for direct buyers to enable smallholders to access the maximum
farmgate price available. Basic practices like using precision and
updated weighing scales, clear quality specifications and corresponding
prices, farmer-observed quality sampling and reporting, and
documentation of transactions, are all essential and yet not standard
practice.

Downstream buyers can use their market leverage, supplier

benchmarking and supplier incentive strategies to encourage suppliers
to adopt such practices.

3. Reduce and offset farmgate price-risk exposure and price

volatility
Higher and stable farmgate prices can be achieved through a fairer
allocation of risks and risk-mitigation costs across the value chain.

Most actors have mechanisms for risk management, from hedging on

financial markets to strategic inventory and financial reserves, to using
supply or market leverage in negotiations with trade partners.
Meanwhile, farmers have no such risk-mitigation equivalents, or they do
not have the resources to use them. Buying commitments and contracts
are still rare between smallholders and their buyers, even in supply
chains where purchase contracts with balanced terms for both buyers
and seller are common further downstream.

Procurement teams can apply common practices with other partners to

their sourcing approach with smallholders. Formalising and
guaranteeing orders and transactions is a start. Procurement teams can
offer contracts that guarantee purchase volumes of varying product
specifications, including corresponding prices for different product
specs, and relevant payment terms such as reducing time between
product delivery and payment. This eliminates significant price and
market risk for farmers. Long-term contracts that are balanced between
parties are preferred.

Downstream actors can require their trade partners to formalise

sourcing relationships with farmers through their own purchase
agreements or through supplier incentives and benchmarking practices.

Investing in risk mitigation on behalf of farmers is also possible.

Farmers can utilise physical risk-mitigation strategies such as product
sorting and strategic inventory management, or financial risk -mitigation
strategies such as hedging and insurance – but they need financial and
other resources to do so.

Front line of sourcing

Procurement teams are on the front lines of smallholder sourcing.

Making a business case for smallholders is an essential function for all
procurement teams, and more broadly for all supply chain companies
who are dependent on smallholders for their own success. Luckily,
numerous untapped resources and strategies exist to improve
relationships with and outcomes for smallholder producers regardless of
dominant market mechanisms. These opportunities simply need to shift
from marketing and CSR narratives, or sustainability siloes, into
procurement practice to make all businesses in supply chains grow.