Definition
Cost-plus pricing is a contract agreement for payments to farmers, setting the price at a pre-determined margin above the average cost of production. This method therefore aims to establish a safe minimum income for producers, (and sometimes simultaneously sets a maximum). This method requires the establishment of average costs of production differentiated by local context (region, value chain), and an agreement among the value chain actors to ensure that the risk is shared.
Lead Actors
Farmer Organisation; Off-taker
Target Demographics
Farmers
Objectives addressed
Farmer related
Increase farmer income:
Cost-plus pricing increase incomes by providing a price that allows the farmer to make a profit and by improving farmers' ability to invest in their farms which in turns leads to higher income.
Strengthen income stability:
Cost-plus pricing can strengthen farmers' financial stability by reducing their exposure to price drops, therefore aiding in planning for investments and covering all of their operational expenses while allowing for a profit.
Improve yields:
Cost-plus pricing can increase yield by incentivising farmers to invest for the required quantity and quality of inputs and labour in their farms. By having the right inputs and hiring labour when needed, farmers can expect higher yields.
Business related
Reduce side-selling:
Cost-plus pricing can reduce side-selling especially when market prices are low, as it offers farmers a predictable and fair income that covers their production costs and includes a guaranteed margin—making it more attractive than volatile spot market prices. This guaranteed margin provides a safety net, incentivising farmers to comply with their contracts rather than risk lower earnings elsewhere.
Address sourcing needs:
Cost-plus pricing can support buyers’ sourcing needs in the same way in which off-take contracts do. Primarily by incentivising farmers to produce a certain crop variety, at a certain level of quality at given volumes.
Contexts Best Suited to
Non-perishable goods: where off-takers can store goods to sell when prices are favourable.
Key Risks
Cashflow & performance stability: unforeseen events can affect the prices of labour, inputs etc, price volatility.
Market risk: If the market price drops significantly, the off-taker is out of pocket unless they are hedged against downside price risk.
Market risk: If the market price drops significantly, the off-taker is out of pocket unless they are hedged against downside price risk.
Environmental Impact
Limited:
Link with environment relatively minimal.
Ambition level
Low
Time
Main time need is collecting quality data on production costs of producers, to calculate the cost-plus pricing amount.
Investment Need
Main costs incurred would be due to collection of information on farmer production costs and the determination of the price.
