Fairtrade Living Income Reference Price for Coffee from Aceh

Fairtrade Living Income

Reference Price for Coffee

from Aceh, Indonesia

EXPLANATORY NOTE

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 2

Introduction

This document explains the ﬁgures and validation process behind the Fairtrade

Living Income Reference Price for organic Gayo coffee from Indonesia. Living

Income Reference Prices play a pivotal role within Fairtrade’s holistic Living

Income Strategy. They are instrumental for raising awareness around the

fundamental need for sustainable pricing as part of a smart mix of interventions

to enable living incomes, and they inform price setting mechanisms for

Fairtrade and other actors committed to sustainable trade.

Fairtrade began to develop the ﬁrst Living Income Reference Prices for coffee

in a context of historically low futures market prices. In March 2019, the World

Coffee Producers Forum condemned these and called for immediate action to

avoid a humanitarian crisis for some 25 million smallholder families around

the world. They warned that by allowing the impoverishment of producers,

the coffee industry was compromising its own future.

Later that year, the

International Coffee Organization (ICO) committed to fostering responsible

sourcing of sustainably grown and traded coffee, enabling a living income for

coffee producers.

By establishing Living Income Reference Prices, Fairtrade addresses the

economic conditions for a sustainable coffee sector and brings the true cost of

socially just and environmentally sound production practices into the equation.

Following the completion of the ﬁrst multi-stakeholder price discovery process

in Colombia in June 2021, a Fairtrade Living Income Reference Price for organic

Gayo coffee from Aceh, Indonesia, was established in collaboration with the

Sustainable Coffee Platform of Indonesia (SCOPI) in November 2021. The full

report of the analysis is available on the Fairtrade International website.

The Price Model

A Living Income Reference Price indicates the price needed for a typical

farmer household with a viable farm size and a sustainable productivity level

to make a living income from the sales of their crop.

The model is derived from the universal human right for everyone who works

to a just and favourable remuneration, ensuring an existence worthy of human

dignity. Hence, a full-time farmer should be able to make a living income from

their farm revenues.

A Living Income Reference Price is based on the following key parameters:

1. Cost of a decent standard of living (living income benchmark)

2. Sustainable yields (productivity benchmark)

3. Viable farm size (to fully employ the available household labour)

4. Cost of sustainable production (in order to achieve above mentioned yields)

A price that allows an average farmer household with a viable farm size and a

sustainable productivity level to earn a living income can be calculated with the

following equation:

living income

reference price

cost of decent living + cost of sustainable production

viable land area × sustainable yields

Cover image: Mardiana from the Koptan Gayo Megah Berseri cooperative supplements her income

by selling vegetables. Diversiﬁcation is an important part of Fairtrade’s Living Income Strategy.

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 3

Establishing Living Income Reference Prices

In order to assess the farm economic metrics, Fairtrade introduced farm record-

keeping among coffee farmers, initially in Colombia, Uganda and Indonesia. Their

farm investments and outputs were tracked throughout a year during 2019-2020

in record-keeping books. These baseline data served as a primary source for

subsequent analysis and establishment of Living Income Reference Prices.

In Indonesia, the baseline data were collected by farmers in the Aceh Tengah

and Bener Meriah districts of Aceh. These are the largest Arabica-producing

districts in Indonesia with nearly 100,000 hectares of coffee plantations,

producing approximately 63,700 metric tonnes of green bean. There are 21

Fairtrade certiﬁed producer organizations in Aceh, reaching 28,236 individual

farmer households and covering about 30,800 hectares of coffee farm with an

estimated total annual production of 25,760 metric tonnes. Fairtrade certiﬁed

farmer organizations represent 40% of the total Arabica coffee production in

Aceh. Nearly all this coffee is also organic certiﬁed.

A technical roundtable was set up in Indonesia in late 2021, composed of coffee

experts representing producers, the government of Indonesia, industry, and

research institutions. In collaboration with the Sustainable Coffee Platform

of Indonesia (SCOPI), a series of virtual workshops were conducted to analyse

the baseline results and complementary datasets, pool local knowledge and

expertise and agree on the values for each of the variables in the price model.

Based on these variables, a Fairtrade Living Income Reference Price was

established for organic Arabica coffee from Aceh, Indonesia.

Variable 1: Living income benchmark

Living income is deﬁned as sufﬁcient income generated by a household to

afford a decent standard of living for the household members. Elements of a

decent standard of living include: a nutritious diet, decent housing, education,

healthcare, transport, clothing and other essential needs, including a provision

for unexpected events.

The Aceh baseline data showed a typical coffee farmer household to be

composed of four members, with two working age adults and two children.

The living income for a typical household in Aceh was estimated based on

previous calculations of the costs of decent living in other Sumatra provinces

by Wage Indicator (2018)

and the Roundtable for Sustainable Palm Oil (RSPO,

2017). The respective results were adjusted to a four-member household and

updated to 2021, applying ofﬁcial inﬂation rates.

In order to determine the costs of decent living applicable in the Aceh province

of Sumatra, the results were further adjusted in proportion to the regional

differences in the cost of living, as per national statistics on minimum living

needs

and minimum wages

published by province. Table 1 shows an overview

of the comparison.

Encouragingly, similar results of around six million rupiah per month were

found for the WageIndicator costs of decent living applicable to rural Aceh

(ﬁrst column) and those in the RSPO study (third column). This is roughly double

the national and World Bank poverty lines of Rp 3,484,509 and 3,244,288

respectively when converted to Aceh 2021 rates.

A preliminary living income benchmark of 75 million rupiah (US$ 5,245

) per

year for a typical four-member household was proposed for Aceh and validated

by the roundtable (see Figure 1).

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 4

Table 1: Comparative analysis of living income benchmark calculations for

Sumatra, Indonesia

A complete living income benchmark study for coffee growing regions of

Indonesia is envisaged for 2022, as part of the International Coffee Organization

(ICO) Living Prosperous Income Technical Work Stream goals. Meanwhile, this

preliminary benchmark for the cost of decent living is used for the Living Income

Reference Price calculation.

Monthly cost of decent living

for a standard family

(2 adults + 2 children)

WageIndicator RSPO

low-Aceh* high-Aceh* Aceh**

Food 2,955,530 3,736,909 2,084,575

Housing 1,523,581 2,176,545 863,700

Transpor t 522,371 870,618

2,721,854Healthcare 435,309 544,136

Education 652,963 1,088,272

Other costs (~5%) 304,499 420,944 283,507

Monthly living income aceh 6,394,253 8,837,424 5,953,636

Yearly living income aceh 76,731,032 106,049,087 71,443,632

Estimated monthly living wage 4,262,835 5,891,616 3,969,091

Estimated living daily wage 207,943 287,396 193,614

Figure 1: Approximation of the monthly cost of decent living for a 4-member

household in Aceh (2 adults + 2 children)

*Source WageIndicator (2018): updated to 2021 for Aceh region, using inﬂation rates and

proportional regional differences in published minimum wages. The low-end cost ﬁgures are

typically applicable to rural areas, whereas the high-end costs are more relevant in urban areas.

**Source RSPO (2017): study conducted in North Sumatra, updated to 2021 and converted for Aceh

region using inﬂation rates and proportional regional differences from national statistics.

The daily living wage to be factored into the cost of production for hired

labour is derived from the living income benchmark by dividing the yearly cost

of decent living by the number of full-time equivalent workers in a rural family.

Assuming a labour availability of 1.5 persons per family and 246 working days

per year, the living wage is estimated at 75,000,000 / 369, rounded to 200,000

rupiah (US$ 14.00) per day of work. This translates into a monthly salary of Rp

4,100,000 required to earn a living income for the household. For comparison,

the current monthly minimum wage in Aceh is Rp 3,165,031.

cost of nutritious

low-cost diet

Rp 2,500,000

cost of basic

decent housing

Rp 1,200,000

other essential

expenses for

education,

healthcare, clothing,

transport, etc.

Rp 2,250,000

provision for

unexpected

events

Rp 300,000

MONTHLY LIVING INCOME (HOUSEHOLD)

Rp 6,250,000

(Rp 75 million per year)

(Rp 51,370 per person per day)

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 5

Variable 2: Sustainable yields

A sustainable productivity level is deﬁned as a feasible target yield that can

be attained when sustainable agricultural practices are implemented. Both

economic and environmental aspects are considered. By balancing the economic

beneﬁts of high yields with the medium- and long-term effects on natural

resources and climate resilience, an optimum productivity target is determined.

Baseline results show an average coffee yield of 4,019 kg of cherry / 1,364 kg of

wet parchment (gabah in Indonesian) per hectare, and median of 3,515 and 1,170

kg, respectively. A quarter of all surveyed farmers produced over 5,770 kg of

cherry / 1,900 kg of wet parchment per hectare. This yield level was suggested

as a sustainable yield target and subjected to a reality check by the technical

roundtable.

The roundtable experts highlighted that it is not possible to deﬁne one standard

sustainable yield for Indonesia due to the different growing conditions and

production systems in each region, and agreed to set a sustainable yield target

speciﬁcally for Gayo Arabica coffee in Aceh. As Gayo Arabica coffee is well-known

for its organic status and the market requires assurance for the continuation of

this status, the analysis focuses on organic Gayo Arabica coffee.

Key factors affecting productivity are the coffee variety, tree density and

shade management, applied rehabilitation practices (pruning and replanting)

and fertilizer use. The roundtable agreed on an optimal tree density of 1,600-

2,000 trees per hectare and recommended a maximum tree age of 15 years

before replanting is needed in order to maintain adequate productivity levels.

Based on these practices, a sustainable yield range for organic Gayo arabica

coffee between 6,000-7,200 kg of cherry, required for 1,000–1,200 kg of

green bean equivalent (GBE), per hectare was considered feasible. However, a

realistic target yield achievable in the medium-term was agreed to be 6,000kg

of cherry per hectare (see Table 2).

The productivity benchmark was therefore set at 6,000 kg cherry / 2,000 kg

wet parchment / 1,000 kg GBE per hectare for organic Gayo coffee.

Figure 2: Cherry yield distribution, Fairtrade Aceh baseline results 2019/20

10,0008,0002,0000 4,000 6,000 12,000

COFFEE YIELD PER HECTARE (kg cherry)

PERCENT

Coffee yield x hectare

Cherry

(Gelondong merah)

Wet parchment

(Gabah)

Green bean equivalent

(Redy ekspor)

Conversion factor 1 0.333 0.167

Median baseline 3,515 1,170 587

Average baseline 4,019 1,364 671

percentile 5,770 1,921 964

Sustainable yield target:

medium-term

6,000 2,000 1,000

Long-term yield target 7,200 2,400 1,200

Table 2: Current and target yields for coffee cherry, wet parchment and

green bean equivalent

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 6

Variable 3: Viable farm size

In accordance with the universal right to remuneration for work that provides

a decent living

, a hired worker is entitled to a ‘living wage’. Consistent with this

logic, self-employed farmers should earn the equivalent of a living wage for their

work on the farm. Hence, full-time farmers should be able to make a living income

from their farm proceedings. Following this guiding principle, a farm that is big

enough to fully absorb the available household labour should generate a living

income. This is considered a viable farm size or a ‘full-employment farm size’.

Likewise, producers with smaller plots of land would earn a share of a living

income proportional to their time invested in farm work. In those cases, the

household would have time available to supplement their income with other

activities.

The viable or full-employment coffee area was calculated by dividing the

available household labour force by the time household members spend

working on a hectare of coffee. The equivalent of 1.5 working-age adults

multiplied by 246 working days a year for a total of 369 labour days was taken

as the available household labour force.

Based on previously identiﬁed sustainable agricultural practices needed to attain

the productivity benchmark, the labour requirements for each activity were

analyzed, as well as the proportion of the work carried out by family labour.

The baseline data show that household members spent on average 198 days

in total per year on coffee production. A simulation of required sustainable

agricultural practices conducted with the technical roundtable suggests that to

achieve the annual target of 6,000 kg of cherry per hectare, a farmer household

needs to deploy up to 285 days in coffee production (see Table 3).

Table 3: Overview of labour requirements per hectare to produce target

sustainable yield of 6,000 kg/ha

Labour

requirements x

hectare

Family labour

(maximizing hh labour

utilization)

#days/

Hired labour

(@daily living wage

Rp 200k)

Rp/ha

Fertilization

[2 applications

x year,

combination of

20% cherry pulp

+ 80% compost,

applied in rorak

hole]

application cherry pulp: 500kg/

day > 10 days for 5ton

n/a

application ready-made

compost: 500 kg/day > 6 days

for 2.8 ton

digging rorak hole: 65 holes/day

> 25 days for 1600 trees

Pest management

[4 x per year]

installing traps with

attracants: 2-5 days/ha

4 n/a

Weed control

[3 x manual

weeding + 1 x

hired mechanical

service]

manual weeding: 3 x 25 days/ha 75

grass-cutter service

@Rp 1.5m/ha

1,500,000

Rejuvenation

[1 x post-harvest

pruning + 3 x

light pruning

+ rejuvenation

pruning every 5

year]

post harvest pruning: 50 trees/

day > 32 days

n/a

light pruning: 100 trees/day > 16

days x 3 times/year > 48 days

rejuvenation pruning [1/5th

each year]: 25 trees/day > 13

days

Harvest 50 days x 5-6 kaleng 50

remaining 250

kaleng harvested

by hired labour @Rp

31,000/kaleng*

7,750,000

Replanting

[100 trees x year]

replanting of 100 trees per

year: 50 plants/day > 2 days for

yearly replanting

hole preparation +

fertilizer application

> 4 days

800,000

Total labour requirements (ex post-harvest) 265 10,050,000

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 7

Throughout the year, except for the harvest, the family members can take care

of most of the farming activities. Hired labour is only needed for mechanical

weeding and crop renovation.

It is important to note that the number of working days also depends on the

use of technology. For example, the use of grass cutter machines signiﬁcantly

decreases the time required for weed control. For this calculation, a combination

of manual weeding by the household and hired motorized grass cutter service

is factored in.

The highest labour intensity occurs during the coffee harvest, which is

concentrated in a period of 4-5 months. With optimized household labour

utilization, approximately 50 household labour days can be deployed during

harvest, collecting an average of 60 kg of cherry per day for a total of 3,000

kg/year. The remaining cherry needs to be collected by hired workers. For one

hectare producing 6,000 kg, this would be 50% of the total harvest labour

requirement.

The humid climate makes post-harvest processing very difﬁcult in the region, and

therefore most coffee in Aceh is sold as cherry. In case the coffee is sold as wet

parchment (gabah), the post-harvest processing is usually outsourced. A total of

8 working days are considered for any post-harvest logistics and handling.

To fully absorb the available household labour in coffee farming, a farm size of

1.3 hectares would be required. However, the baseline data show an average land

ownership of 0.9 hectare per household. Therefore, the technical roundtable

examined other scenarios with less than 100% absorption of household labour

in coffee farming. In order to absorb 90% of the household labour, a crop area of

1.2 hectare is needed, 1 hectare could absorb 80%, and 0.9 hectare could absorb

70%, as shown in Table 4.

Table 4: Coffee area needed to fully or partially absorb

available household labour

These scenarios are further assessed in the ﬁnal reference price modelling, but

considering the unlikeliness of increasing farm sizes, the roundtable experts

agreed in principle to establish a minimum viable farm size of 1 hectare, with

the expectation that 80% of the living income should be generated from

coffee sales and 20% from other income sources.

Total available household

labour days per hectare

(including admin)

Proportion of avg available

household labour to absorb

through coffee production

Coffee farm size needed

to absorb proportion of

household labour (in hectares)

285 days

100% 1.3

90% 1.2

80% 1.0

70% 0.9

*Assuming average household of 1.5 full-time adult workers

Aceh, Sumatra, Indonesia

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 8

Variable 4: Cost of sustainable production

The cost of sustainable production is calculated based on the crop investments

needed to reach the targeted sustainable productivity level. Hired labour

remuneration is factored in at a living wage, so that the Living Income Reference

Price not only allows coffee farmers to earn a living income, but also to pay

their workers a living wage.

Figure 3: Correlation between coffee productivity and cost of production

VAIRABLE COSTS OF COFFFE PRODUCTION

(in million rupiahs)

8,000 10,000 12,0006,0004,0002,0000

COFFEE YIELD PER HECTARE (kg cherry)

r = 0.54

Observed values

Fitted values

Fairtrade baseline results show a moderate to strong correlation between

productivity and (variable) cost of production. Hence, the farm investments of

the best performing quartile were examined by the roundtable experts, as a

basis for determining the cost breakdown needed for a sustainable production

of 6,000 kg/ha.

Table 5: Average expenditures in coffee production for entire sample and

best performing quartile, Fairtrade Aceh baseline results 2019/20

Cost of production x hectare

Baseline average/

median*

Average/median*

>5,700 kg/ha

Fertilizer (purchased and produced) 777,000 786,000

Other inputs for coffee 125,000 220,000

Hired labour coffee non- harvest 742,000 750,000

Paid labour harvest (hired & household) 4,270,000 8,149,000

Tools, materials & equipment* 743,000 1,022,500

Other expenses* 1,400,000 1,940,000

Total costs for coffee production 8,057,000 12,867,500

53 year-old Suwarno picks the coffee cherries in their farm in Paya Dedep Village,

Jagong Jeget District, Aceh, Indonesia.

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 9

Figure 4: Actual cost break down per hectare for entire sample and

best performing quartile, Fairtrade Aceh baseline results 2019/20

*Median values are used for tools & equipment and other expenses to provide a more

representative value, due to extreme outliers distorting the average result.

The cost items were further discussed in focus groups and adjusted to adequately

reﬂect the required inputs, labour investment and other costs throughout the

production cycle in order to reach the target yield at current prices.

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

Fertilizer

Other inputs

Hired labour non-harvest

Paid labour harvest

Tools, materials & equipment

Other costs

median baseline median >5700kg

cherry/ha

PRODUCTION COSTS (in rupiah)

The ﬁnal calculation of the cost of sustainable production considers the cost

of organic fertilizer (combination of cherry pulp and compost) and other inputs

(attractants for pest control, seedlings for yearly replanting of 100 trees), hired

labour costs (for harvesting, weeding and replanting), transportation, materials

and depreciated costs of tools and equipment.

By far the highest cost is for hiring labour, especially for harvesting. The

cost of hired labour was calculated based on the previous analysis of labour

requirements (see variable 3). The number of hired labour days required,

besides the harvest and if not paid per task, was multiplied by a daily living

wage of Rp 200,000. This living wage is derived from the cost of decent living

in Variable 1.

During the harvest, collectors are hired to pick around 50-70% of the total

coffee volumes and are paid per kaleng (12 kg of cherry) collected. An average

worker can pick around 6.5 kaleng (78 kg) per day, which at a piece rate of Rp

31,000 per kaleng would allow farm workers to earn a decent wage. This was

considered feasible.

On-farm post-harvest processing is not common practice in Aceh, due to the

humid weather conditions, which cause delays in drying and potential quality

deterioration. However, some farmers process the cherry into wet parchment

(gabah). This service is usually outsourced at a cost of Rp 2,000 per kaleng or

Rp 1 million to process 6,000 kg of cherry.

A ﬁxed sum of Rp 400,000 was added for administrative expenses, such as the

payment of services, taxes and cooperative membership fees.

Table 6 provides a detailed overview of the cost of sustainable production

breakdown.

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 10

Table 6: Cost of sustainable production breakdown per hectare The average annual investment required to

produce 6,000 kg of cherry is 23,190,000 rupiah

(US$ 1,622) per hectare when delivering coffee

cherry.

In case the coffee is processed into wet parchment,

the cost of production increases to Rp 24,190,000

(US$ 1,692) for an equivalent of 2,000 kg of wet

parchment coffee (gabah).

required investment x hectare agri inputs Rp/ha

hired labour

(@daily living wage Rp 200k)

Rp/ha

Fertilization

[2 applications x year,

combination of 20% cherry

pulp + 80% compost, applied

in rorak hole]

cherry pulp + organic waste:

required: 25 kg/tree = 40ton

available: 5ton (=12.5% or 200 trees)

–

n/a

ready-mixed compost:

required: 2kg/tree x 1400 trees = 2.8

ton @Rp 3m/ton

8,400,000

Pest management

[4 x per year]

attractants: 24 bottles x 3 sachets x

4 times/year = 288 sachets

@Rp 5000

1,440,000 n/a

Weed control

[3 x manual weeding + 1 x hired

mechanical service]

n/a

grass-cutter service @Rp

1.5m/ha

1,500,000

Rejuvenation

[1 x post-harvest pruning + 3

x light pruning + rejuvenation

pruning every 5 year]

n/a n/a

Harvest n/a

remaining 250 kaleng

harvested by hired labour @

Rp 31,000/kaleng*

7,750,000

Replanting

[100 trees x year]

coffee seedlings: 100 @Rp 2500 250,000

hole preparation + fertilizer

application + tapping > total

4 days

800,000

Total variable costs (ex post-harvest) 10,090,000 10,050,000

Post-harvest (pulping)

[outsourced]

n/a n/a

Total variable cost (incl post harvest) 10,090,000 10,050,000

Admin & misc ﬁxed costs n/a n/a

Total cost x hectare (cherry) 10,090,000 10,050,000

Total cost x hectare (gabah) 10,090,000 10,050,000

Sunarno Karang Rejo from the Ara Cahayani Gayo cooperative

ﬁlls out the farm records book, which allows farmers to track

their expenses and make smart business choices.

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 11

Preliminary Living Income

Reference Prices

With the variables deﬁned in the previous

chapters, Living Income Reference Prices at farm

gate were modelled for organic Arabica coffee

from Aceh, Indonesia.

Table 7 summarizes the agreed key parameter

values of the price model and the respective Living

Income Reference Prices with varying crop areas.

Four scenarios were compared:

i. actual average land area of 0.9 hectare

generating 70% of a living income;

ii. viable land area of 1 hectare generating 80%

of a living income from coffee;

iii. a full-employment farm size of 1.3 hectares

generating a living income;

iv. as in ii) but with coffee processed and sold as

wet parchment by the farmer.

Table 7: Living Income Reference Price modelling with varying crop areas and respective percentage of

living income to be generated from coffee sales

Scenario

% income

from coffee

i ii iii iv

70% 80% 100% 80%

Variable Unit

LIRP

(cherry)

LIRP

(cherry)

LIRP

(cherry)

LIRP

(wet parchment)

(A) viable land area ha 0.9 1.0 1.3 1.0

(B) sustainable yields kg/ha 6000 6000 6000 2000

Cost of agricultural inputs IDR/ha 10,090,000 10,090,000 10,090,000 10,090,000

Hired labour cost non-harvest IDR/ha 2,300,000 2,300,000 2,300,000 2,300,000

Hired labour cost – harvest IDR/ha 7,750,000 7,750,000 7,750,000 7,750,000

Other costs (transport, materials, processing) IDR/ha 2,050,000 2,050,000 2,050,000 3,050,000

Total variable costs x hectare IDR/ha 22,190,000 22,190,000 22,190,000 23,190,000

Fixed costs IDR 1,000,000 1,000,000 1,000,000 1,000,000

(D) living income IDR 52,500,000 60,000,000 75,000,000 60,000,000

(C+d/axb) living income reference price IDR/kg cherry 13,606 13,865 13,442 n/a

Equivalent price for wet parchment

(conversion factor 3)

IDR/kg gabah 40,817 41,595 40,326 42,095

LIRP = Living Income Reference Price

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 12

Since the resulting reference prices for each scenario are very similar, it was

agreed to take the rounded average and establish the Fairtrade Living Income

Reference Price for Aceh coffee at Rp 13,600 (US$ 0.95) per kilogramme of

cherry at farmgate.

The reference price for coffee sold as wet parchment (gabah) would be

Rp 42,100 (US$ 2.94) per kilogramme at farmgate.

Figure 5: Living Income Reference Price modelling with varying crop areas and

respective percentage of living income to be generated from coffee sales

Implementing Living Income Reference Prices

By establishing Living Income Reference Prices, Fairtrade quantiﬁes the gap

between market and sustainable prices at farmgate level and emphasizes the

need to address price as a crucial factor to attain sustainable supply chains

that enable farmers to earn a living income.

Current international coffee market prices are exceptionally high compared

to when baseline data were collected (see Figure 6). While in 2019/2020 a

kilo of Gayo coffee was sold at Rp 6,900 on average, during the ﬁrst months

of 2022 the internal farmgate prices osciliated between Rp 10,000 and 11,700

per kg of cherry, approaching the Living Income Reference Price. It is therefore

encouraging to realize that Living Income Reference Prices seem within reach

for the coffee industry.

Figure 6: Living Income Reference Price compared against

actual farmgate prices in Aceh (per kg cherry)

Net income from coffee

Diversiﬁed income

Cost of production

Fairtrade Living Income Reference Price

Living income benchmark for Aceh

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

Market price LIRP

average 2019/20

Jan 2022 Feb 2022

51%

of LIRP

86%

of LIRP

75%

of LIRP

FARMGATE PRICE (in rupiah)

120

100

0.9 ha

1 ha

1.3 ha

15,000

14,500

14,000

13,500

13,000

12,500

12,000

HOUSEHOLD INCOME NEEDED TO

COVER LIVING INCOME BENCHMARK + COST OF

SUSTAINABLE PRODUCTION

(in million rupiah)

LIVING INCOME REFERENCE PRICE

CALCULATION PER FARM SIZE

(in rupiah)

FARM SIZE

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 13

By applying average conversion factors

, estimated operational costs of the

producer organization for processing and export handling in Aceh and an

exchange rate of 14,300 rupiah to a dollar, an indicative FOB (free on board, or

export) price of US$ 2.82 per pound of green coffee (green bean equivalent or

GBE) would apply, based on a Living Income Reference Price paid at farmgate,

as summarized in Table 8.

However, the actual FOB prices will depend on the particular situation and

cost structure of each producer organization and will have to be negotiated

between seller and buyer, in order to factor in all relevant costs incurred

by producer organizations, so they can pay their members a Living Income

Reference Price at farmgate.

Table 8: Approximate farmgate – FOB price conversion

Farmgate – FOB conversion IDR USD

LIRP cherry at farmgate /kg cherry 13,600 0.95

LIRP GBE at farmgate /kg GBE 81,600 5.71

processing costs /kg GBE 3,776 0.26

operational costs SPO /kg GBE 2,860 0.20

export costs /kg GBE 527 0.04

LIRP proxy GBE at FOB /kg GBE 88,763 6.21

LIRP proxy GBE at FOB /pound GBE 40,347 2.82

It must be stressed that the Living Income Reference Price is just one tool,

which – in combination with other interventions – is needed to close the income

gap and therefore there is no guarantee that by paying a LIRP all farmers will

earn a living income. Nonetheless, payment of a LIRP, along with long-term

sourcing agreements, are considered essential purchasing practices that

buyers are responsible for to enable living incomes for farmers in their supply

chains. On the other end, farmers are equally responsible for implementing

the sustainable agricultural practices to meet the productivity target.

Iwan Ariatona (39, right) and Sukirno (43, second right) visit the farmer members of their

cooperatives to check and report on their ﬁeld.

Fairtrade Living Income Reference Prices for Coffee from Aceh, Indonesia 14

Endnotes

1 https://dailycoffeenews.com/2019/03/27/coffee-producers-demand-immediate-ac-

tion-amidst-price-crisis

2 https://www.ico.org/documents/cy2018-19/wp-council-302e-london-declaration.pdf

3 https://wageindicator.org/salary/living-wage/archive-no-index/indonesia-livv-

ing-wage-series-january-2018-country-overview

4 https://www.bps.go.id/dynamictable/2016/06/30/1212/kebutuhan-hidup-minimum-layy-

ak-khm-khl-selama-sebulan-rupiah-menurut-provinsi-2005-2015.html

5 https://wageindicator.org/salary/minimum-wage/indonesia

6 Applied exchange rate 1USD = IDR14,300 (rupiah)

7 The Universal Declaration of Human Rights establishes: “Everyone who works has the right

to just and favourable remuneration ensuring for himself and his family an existence worthy

of human dignity.”

8 Approximately 6 kg of coffee cherry is needed to produce 2 kg of wet parchment or 1 kg of

exportable green bean, and 1kg=2.2 pounds.

Fairtrade integrates voluntary payment of the Living Income Reference Prices

in living income pilot projects with committed buyers and their supply chain

partners. By implementing the holistic living income strategy on a controlled

scale, Fairtrade seeks to demonstrate its effectiveness and validate the price

component as a critical driver to achieve living incomes.

Furthermore, for farmers who do not have the minimum viable farm size it

is unlikely that living incomes will be generated from farm revenues only.

Although these farmers can earn a proportional share of a living income from

coffee sales, supplementary income generating opportunities will be needed to

fully bridge the income gap. With an average coffee area in Aceh of 0.9 hectares,

this means that 30% of a living income needs to come from additional income

sources other than coffee.

Fairtrade recommends that the mandatory Fairtrade Premium is not counted

towards the Living Income Reference Price, but is paid on top to the producer

organization. The Fairtrade Premium is an important source of income for

producer organizations to cover operational costs, including adequate service

delivery to their members. Empowered producer organizations play a crucial

role in supporting their members reach target yields, reduce costs, add value,

diversify income sources and enhance farm resilience, all of which contribute

to achieve living incomes.

Finally, most buyers do not purchase all the coffee produced by a producer

organization and thus the Living Income Reference Price will only be received for

part of the sales. This means that the price differential will get diluted over the

total volumes, if not all buyers commit to paying the Living Income Reference

Price. Hence, this is a call to the coffee industry to jointly commit to sustainable

prices, so that living incomes can become a reality for coffee farmers.

The Living Income Reference Price model makes up an integral part

of Fairtrade’s Living Income Strategy. Fairtrade is constantly testing

and improving its model in order to develop a standardized approach

for establishing sustainable price levels for smallholder farmers,

applicable to a wide range of commodities and regions. We welcome

your feedback in this process.

For more information or comments, please contact:

Carla Veldhuyzen van Zanten • Senior Advisor Sustainable Livelihoods

c.veldhuyzen@fairtrade.net

the

future

is fair

Fairtrade International • Bonner Talweg 177, 53129 Bonn, Germany

Telephone: +49 (0)228 949230 • info@fairtrade.net • www.fairtrade.net