Quality Premiums
Definition
A quality premium is the additional percentage paid to farmers above the standard farm-gate price, reflecting the superior quality of their product (i.e., farm-gate price plus premium). It rewards farmers for meeting specific quality requirements, incentivising higher-quality production. These premiums facilitate control over quality (e.g., purity, maturity, moisture). Quality premiums are often bundled with offtake contracts, with implementing actors' commitment to buying all output which meet their segmented, quality standards. The amount of premium paid to farmers is determined by the quality standard they have met.
Lead Actors
Downstream supply chain actors; Off-taker
Target Demographics
Farmer Groups; Smallholder Farmers
Objectives addressed
Farmer related
Improve yields:
Bundled support often provided to farmers under conditions of quality premium agreement (incl. inputs, GAP training, technical guidance) contribute to higher, better quality yield.
Increase farmer income:
Increased incomes for farming households are driven by high prices achieved through better quality outputs which offset any additional investment or input costs farmers incur during farming cycle.
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.
Business related
Address sourcing needs:
Quality 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, farmers can align production with market demand, further increasing the likelihood of consistent and sufficient supply.
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.
Contexts Best Suited to
Export value chains: where premiums are demanded by markets for quality, safety and sustainability.
Contract farming: where premiums can be embedded into contracts.
High-touch models: where farmers get sufficient support to improve quality.
Formal farmer groups/organisations: better positioned to meet demands.
Contract farming: where premiums can be embedded into contracts.
High-touch models: where farmers get sufficient support to improve quality.
Formal farmer groups/organisations: better positioned to meet demands.
Key Risks
Increased Procurement Costs: Implementing quality premiums may lead to higher procurement costs, impacting the buyer's budget.
Limited Supplier Pool: Stringent quality criteria may reduce the pool of eligible suppliers, potentially limiting sourcing options.
Limited Supplier Pool: Stringent quality criteria may reduce the pool of eligible suppliers, potentially limiting sourcing options.
Environmental Impact
Limited:
The focus to improve quality may be achieved through sustainable practices (healthy crops with better soils, shade etc.) or unsustainable practices (monocrop new seeds, irrigation, spraying etc.).
Ambition level
Medium
Time
Considerable one-off time investment required at the outset to build trust with farmers and to establish the terms of the quality premium agreement (criteria for quality standards, price paid for X volume of quality standard A, quality standard B, etc.). Recurring time investment required to collect data for quality compliance monitoring (during season and at harvest). However, monitoring can be bundled with existing extension engagements to reduce time needs.
Investment Need
Upfront investment in the support services that are often bundled with quality premium agreements, including input service provision, technical assistance, and post-harvest services. Payout to farmers higher than going market price. Procurement costs recovered/offsetted through onward sale at higher price to premium market.
