Certification Premiums
Definition
Certification is a voluntary set of standards that a product is required to meet in order to be certified (e.g., organic, Fairtrade, Rainforest Alliance). Certification premiums offer a (percentage) increase on farmgate price to farmers who comply with certification standards. Offtake companies often pay for farmer (groups) to become certified, covering the annual audit costs and providing training on certification requirements on an annual basis. Company field officers conduct follow-up visits on adoption of certification standards. Certification premium aims to achieve improved farm management and productivity, often with environmental and ethical considerations, and to appeal to growing global demand and willingness to pay for increased transparency, quality and safety.
Lead Actors
Downstream supply chain actors; Off-taker
Target Demographics
Farmer Groups; Farmer Organisations; Smallholder Farmers
Objectives addressed
Farmer related
Boost access to finance:
Certification premiums enable farmers to access higher-value markets by meeting specific quality and sustainability standards. This improved market access often results in more stable and increased income, which strengthens farmers’ financial profiles and makes them more attractive to financial institutions, ultimately improving their bankability.
Strengthen income stability:
With companies' commitment to offtake all produce that meets quality standards, farmers that comply with quality requirements (and who are not hit by climate or other shocks) have increased income predictability at the end of each harvest.
Improve market access:
Offtake is guaranteed to those who meet quality requirements and producers are guaranteed a percentage higher than the going market price.
Increase farmer income:
Fair Trade certifications aim to ensure that farmers receive fair prices for their products, contributing to increased income and improved livelihoods. Organic certification allows farmers to sell their products at premium prices, potentially increasing overall income and providing a competitive edge in the market.
Increase climate resilience:
By incentivising improved farm management practices, certification premiums indirectly contribute to positive environmental impact, mitigating risks associated with soil degradation, water pollution, and harm to non-target organisms. With premium payments, farmers are better positioned to invest in their farms, contributing in the longer-term to increased climate resilience.
Business related
Increase revenues:
Offtake is guaranteed to those who meet quality requirements and producers are guaranteed a percentage higher than the going market price.
Reduce side-selling:
Premium prices or bonuses have been shown to motivate farmers to participate in contractual arrangements, increasing farmer loyalty which is expected to reduce side-selling tendencies.
Attract investment:
Increased investor interest is likely, given the growing global consumer demand for certified produce. This access to premium makes companies offering certification more investable.
Improve sourcing efficiency:
By engaging in a certification program and paying premiums to farmers, companies ensure they have a fixed farmer base that produces the right quality and quantity at recurring intervals. This positively impacts sourcing efficiency, as the company secures an increased fixed proportion from the farmer base (e.g., 60%), and only need to look elsewhere for the remainder (e.g., 40%) to meet their volume/quality sourcing needs.
Address sourcing needs:
Certification premiums incentivise higher quality and volume, contributing to addressing sourcing needs. Additionally, when companies define and communicate the crop varieties they are willing to offtake under the certification specifications, farmers can align production with market demand, increasing the consistency of supply while enabling companies to better plan volumes and ensure quality. Moreover, the price premium is likely to reduce side-selling, increasing sourcing security.
Contexts Best Suited to
High-value, cash crops and/or Export value chains: where there is downstream demand for certification.
Contract farming: where premiums are embedded into contracts to incentivise farming practices.
High-touch models: where farmers are given the adequate support.
Aggregated farms: reduces the burden of monitoring.
Formal farmer groups/organisations: reduces the burden of monitoring and administration.
Contract farming: where premiums are embedded into contracts to incentivise farming practices.
High-touch models: where farmers are given the adequate support.
Aggregated farms: reduces the burden of monitoring.
Formal farmer groups/organisations: reduces the burden of monitoring and administration.
Key Risks
Increased Procurement Costs: Implementing (sustainable) agricultural certification premiums may lead to higher procurement costs, impacting the buyer's budget.
Limited Supplier Pool: Stringent certification criteria may reduce the pool of eligible suppliers, potentially limiting sourcing options.
Market competition (where consumers prioritise lower prices): Buyers offering sustainable agricultural certification premiums may need to balance the costs associated with premiums against the need for competitive pricing. The trade-off involves supporting sustainability while remaining competitive in the market.
Limited Supplier Pool: Stringent certification criteria may reduce the pool of eligible suppliers, potentially limiting sourcing options.
Market competition (where consumers prioritise lower prices): Buyers offering sustainable agricultural certification premiums may need to balance the costs associated with premiums against the need for competitive pricing. The trade-off involves supporting sustainability while remaining competitive in the market.
Environmental Impact
Positive:
Certification programs encourage farmers to adopt sustainable and environmentally-friendly practices. The financial incentives can help farmers mitigate the costs associated with these practices, leading to better environmental outcomes on their farms. Fair trade certifications often encourage sustainable and environmentally friendly farming practices, contributing to overall environmental conservation. Organic farming practices prioritise soil health, contributing to improved soil structure, nutrient cycling, and reduced environmental impact.
Ambition level
Medium
Time
High time investment to obtain and keep certification: application to certifying body, company training on certification principles, maintenance of documentation to demonstrate standards are being met, facilitating routine inspections and audit by certifying body, ongoing monitoring to ensure farmers comply to standards.
Investment Need
Upfront investment to apply to certification body.
Increased service delivery cost: to provide inputs, training and monitoring.
Increased procurement costs to pay farmers premium.
Increased service delivery cost: to provide inputs, training and monitoring.
Increased procurement costs to pay farmers premium.
