Rethinking How We Pay Farmers For Sustainable Crops

Animated picture of a farmer in blue overhauls standing next to certified crops, including a tomato, broccoli and zucchini.

This is a summary of a story that originally appeared on Fuqua School of Business.

A new study found that payments designed to support small farmers who are growing and harvesting certified organic foods may end up hurting the farmers and the demand for certified products.

The study, co-authored by Can Zhang, an associate professor of operations at the Fuqua School, notes that for decades, sustainability labels like Fairtrade and Rain Forest Alliance have endorsed making an extra payment — called a premium — to certified farmers in addition to market prices.

Traditionally, the bonus payment has been a fixed amount, and farmers receive bonuses regardless of the fluctuating prices for cocoa, coffee or oranges.

Recently, some certifying organizations have begun pushing for “flexible premiums.” Those premiums would rise when market prices fall and will cushion the economic shock farmers experience during market downturns.

The study notes that however well-intended, flexible premiums could in some instances hurt farmers and potentially shrink the overall supply of certified products.

“Premium design is a balancing act,” Zhang said. “The same mechanism that protects farmers from price drops can also discourage firms from buying as much certified crop — so it’s important to understand its full implications.”

To explain how a sustainability market works, the study’s authors built a model capturing how non-governmental organizations (NGOs), companies and farmers interact in sustainable agricultural supply chains.

They found that while flexible premiums can create “win-win-win” situations under certain conditions, the premiums can sometimes end up reducing farmers’ expected income and sustainable sourcing — exactly the opposite of what they were supposed to achieve.

To find out more, visit the Fuqua School of Business website.