Pricing Organic

"Prices for organic cotton must reflect the true value of organic and cover real costs, as well as provide an incentive to farmers growing organic for all their hard work and efforts. Organic should have a distinct business model."

Patrick Hohmann, founder of Remei AG, Switzerland and chair of bioRe Foundation

IFOAM refer to one of their four main principles as the Principle of Fairness, claiming that,

Organic Agriculture should build on relationships that ensure fairness with regard to the common environment and life opportunities. Fairness is characterized by equity, respect, justice and stewardship of the shared world, both among people and in their relations to other living beings.

This principle emphasizes that those involved in organic agriculture should conduct human relationships in a manner that ensures fairness at all levels and to all parties - farmers, workers, processors, distributors, traders and consumers. Organic agriculture should provide everyone involved with a good quality of life, and contribute to food sovereignty and reduction of poverty. It aims to produce a sufficient supply of good quality food and other products. Natural and environmental resources that are used for production and consumption should be managed in a way that is socially and ecologically just and should be held in trust for future generations. Fairness requires systems of production, distribution and trade that are open and equitable and account for real environmental and social costs.

Abridged from IFOAM http://www.ifoam.org/about_ifoam/principles/index.html

Approaches to trade 

Organic "premium" There is no universally-accepted or formalised mechanism for arriving at a price for organic cotton; ironically, making the process of sales transactions far from transparent. The rule-of-thumb is to take the commodity price (this is usually the price quoted in the country of origin or on the commodity market at a set time) and add a percentage increase (often called a ‘price premium’). From our understanding this percentage can range from 5 to 50 percent depending on a number of factors such as market conditions/price elasticity, arrangements between supply chain players, and product quality. The premium is supposed to cover cost of production (for farmers), organic certification, training and extension services, and investment in farming operations. Depending on the way the producer group is structured, a percentage of the premium may go towards the collective needs of the community such as schooling, health care, and housing. The objective of the price premium is to help both parties arrive at a fairer price; one that is more likely to reflect the cost of production and viability of the business. However, pricing organic in this way is still vulnerable to the volatility of the commodity market.  

Business as usual Depending on the business model, trade transactions can take place between a number of different actors within the supply chain. Commonly, brands, retailers or manufacturers (usually the ones ultimately in charge of the fiber contract) have buying teams or subcontractors who are responsible for purchasing the cotton fiber on behalf of the company from the ‘open market’; cotton traders or other intermediaries (sometimes the intermediary will be the ginner or spinner i.e. the initial buyer of the seed cotton or baled lint). In these cases, whilst the certificate of the organic cotton is traceable, the end-customer (e.g. brand or retailer) will not necessarily know who grew it or details of production, although certification can indeed provide this level of detail. It’s also not necessarily clear who is benefiting from the ‘price premium’ and by how much. This model usually has many players or ‘links’ in the chain. The ‘deal’ between players will depend upon market conditions at the time, or the urgency of the grower to sell his cotton.

Improving trade relations An increasingly attractive option is a value chain model which allows the brand/retailer or the manufacturer to develop a closer and longer-term business relationship with the producer group. Agreements and contractual conditions will be made earlier in the cotton cycle to the mutual benefit and satisfaction of both parties.
 

Benefits to producers include:

  • Prefinancing - to help farmers get started and pay for biological inputs upfront, such as seed, training, inspections etc. ‘Knowledge intensive’ production – which is what organic needs to be – requires investment in renewable resources, such as knowledge and skills. This in turn is more likely to result in a quality product.
     
  • Guaranteed price and guaranteed purchase. Sometimes called forward contracting. Enabling farmers to plan scales of production confidently.
     
  • Timely payment – agreeing a time of payment will help producer group or company managers manage their risk, and enable them to confidently pay their farmers on-time and keep farmers loyal and committed.
     
  • Direct payment – if producer groups are dealing directly with brands and retailers, even through partnership at the spinner or manufacturer level, there is more likelihood of the financial rewards (organic premium) reaching the growers. Middlemen may have their own price hitching that will be driven more by market forces than a ‘fair cost of production’. Note: intermediaries are of course not all ‘evil’ and may play a vital role in effective and efficient sales transactions. ‘Doubly specialised’ intermediaries work transparently with producers and their customers, and have the expertise to manage the logistics and scaling-up necessities for brands and manufacturers.
     

Benefits to brands/retailers and other customers include:

  • Security of supply. Working with producers at an early stage allows brands to communicate their organic cotton requirements directly.
     
  • Less vulnerability to the ‘open market’. Procuring directly may result in more efficient and cost effective procurement due to an agreed purchase.
     
  • Strategic planning. Usually brands and retailers will have targets around their organic cotton collection and percentage increase, etc. Working on these targets directly with producers gives brands more confidence of meeting them, and identifying issues early – if there are any.
     
  • Loyalty and Reputation. Employees, customers, and entire rural communities in developing countries will thank you for it. Building brand loyalty is crucial to business these days. This is one way a brand/retailer can contribute to positive environmental impact and rural economic development.
     
  • Trade not aid for sustainability. One of the best things a brand or retailer can do to contribute to sustainable development. Organic production has proven benefits for the environment (soil vitality, clean water, biodiversity, combating climate change, etc) and for improving socio-economic opportunities for poor rural communities. By procuring organic cotton, a buyer is investing in the futures of the producers and our shared planet.    

To summarise, closer working relationships between growers and buyers are mutually rewarding. Benefits include knowledge intensification and skills building for growers that will ultimately improve yields and quality of product. Benefits to the brand/buyer include security of supply, a predetermined price (which helps both parties plan and calculate costs), closer understanding of supply chain needs (which helps identify/manage risks earlier), and achieving consumer respect, loyalty and a better reputation. 

Where we are seeing more established ‘partnerships’ we are also seeing sector leadership, innovation, shared investment in environmental or community projects, and support of local entrepreneurship. The beauty of doing business 'as if people mattered' is that it’s based on ‘trade not aid’ and usually involves more autonomy for the producers and a more equitable distribution of influence.
 

Sustainable Value Addition

To maintain sustainability within the organic cotton system prices need to reflect:

  • Cost of production
  • Cost of basic needs
  • Cost of development and maintaining a healthy rural economy
  • Ecology and landscape

The cost of production Costs of production need to be met by the price of product at the farm gate in order for farmers to persist with value-addition agriculture such as organic. Without the expectation that costs of production will be met, any investment in converting to organic (such as farmer training, developing rotation systems, and book-keeping for certification) will be considered too risky. Costs of production include producing natural inputs (composts, manure, botanical biocides, etc) ensuring soil fertility, optimising the use of water, improving biodiversity, and building in food security.

The cost of basic needs It is essential that farmers and labourers can cover food needs, education, health and shelter, through the income they generate. Sustainable development includes maintaining the human capital necessary to maintain production, and ensuring that the next generation of land managers are trained.

The cost of development and maintaining a healthy rural economy Pricing must ensure organic farming remains economically attractive. Loss of labour and farm concentrations puts strain on rural communities and economies. The ‘best and brightest’ need to be attracted to remain in rural occupations, rather than migrate to the towns and cities. Surplus wealth is necessary for developing or maintaining the rural economy, services and landscape e.g. woods, lakes, rivers, etc. Any extra wealth generated will also pay off for the investor since it will in turn be invested in improving productivity and the quality of product: such as improved fibre varieties.

The cost of ecological sustainability and landscape The ecological sustainability, biodiversity (including indigenous species), and rural landscape are vital to healthy rural economies and also to urban populations who value diverse landscapes. The intrinsic value of the ‘natural capital’ needs to be recognised and conserved for future generations.

 

Further Considerations

Inputs are not just financial The financials are not solely to do with fibre price but the farm system income, as well as human, natural, and social capital. But there is a base level of price beyond which an organic farm system is not sustainable. Other inputs needed for a healthy system and a reasonable farm income include improving the market access of other crops, improved seeds and research, participation in supply chain profits, etc. 

Organic cotton systems need capital and resources This includes financial capital but also resources and social capital, i.e., the ability to command the attention of policy makers and those who mediate between farming and the wider society.

Variation in farm gate organic cotton prices due to variations in how prices are fixed There is further an even greater divide between these and what farmers identify, during field sessions, as ‘the price that 'makes the difference between subsistence and development’.  The fact that organic cotton prices are still based on conventional prices and do not take into account the differences between organic and conventional systems is a major problem in price discussions. 

 

The Fairtrade Pricing Model

The Fairtrade Minimum Price (where it exists) is the minimum price that must be paid by buyers to producers for a product to become certified against the Fairtrade Standards. The FMP is a floor price which covers producers' average costs of production and allows them access to their product markets. The FMP represents a formal safety net that protects producers from being forced to sell their products at too low a price when the market price is below the FMP. It is therefore the lowest possible price that the Fairtrade payer may pay to the producer. When the relevant market price for a product is higher than the FMP, then at least the market price must be paid.

A Fairtrade Premium is an amount paid to producers in addition to the payment for their products. The use of the Fairtrade Premium is restricted to investment in the producers’ business, livelihood and community (for a small producer organization or contract production set-up) or to the socio-economic development of the workers and their community (for a hired labour situation). Its specific use is democratically decided by the producers.

Organic Differential: For some certified organic products, a minimum organic differential is set. It is the lowest possible differential that producers must receive in addition to the Fairtrade Minimum Price or market price, whichever is higher. If a Premium is set for the conventional product variety, this Premium also applies to the organic product, unless stated differently.

Updates have been made to the Fairtrade seed cotton prices and premiums, following recent consultation, see the outcome of the price and standard review and the announcement from the Fairtrade International Standards Unit

Fairtrade International lists the Fairtrade Minimum Prices and Premiums for all their certified products here. When the market price is higher than the FMP, producers should receive the current market price or the price negotiated at contract signing. You can also download the Fairtrade Guidelines for Evaluating the Costs of Sustainable Production. 

To find out more about Fairtrade visit Fairtrade International

 

Available Downloads:

>> Cost of Production

>> EcoTextile News July 2011: Price Impact