The living income model sets the ‘living income reference price’ for cocoa in Ghana and Côte d’Ivoire.

Let us explain. Inequality in the cocoa chain, and the subsequent extreme poverty, are the root cause of forced labor, illegal child labor and deforestation. So, to solve those problems, paying a higher price for cocoa, more specifically a living income, is a good place to start (although all 5 Sourcing Principles are necessary, of course). 

To pay a living income, you first have to figure out what a living income is. And that's exactly what Fairtrade and Tony’s Chocolonely did with their shared living income model! The living income model is the formula for what we call the 'living income reference price' - the set price for cocoa that enables farmers to earn a living income.

To develop the living income model, Fairtrade and Tony’s Chocolonely have improved existing models, integrated widely accepted benchmarks, done a lot of research and ultimately shared their insights with the chocolate industry.

So, ehm, speaking of the living income model, what is it exactly? Let's dig in..

The living income model is a holistic view where productivity increase, income diversification, and paying a higher price are needed to get farmers to a living income. You can see how Tony's and Fairtrade have used these factors to create a sort of formula above.

And keep in mind, making sure farmers reach a living income is a shared responsibility between the choco companies, cooperatives and farmers.

Now that you know the elements that make up the living income model formula, let's calculate the actual living income reference prices for Ivory Coast and Ghana together. 

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• The costs of living are taken from the living income benchmarks for Ghana and Cote d’Ivoire as set at the end 2018 by the living income community of practice (LICOP) which is supported by GIZ/ ISEAL alliance and Sustainable Foodlab. In other words, a pretty respectable source of info.
• The costs of farming are calculated from local costs for inputs and hired labor (beyond household labor) and fixed costs for materials and logistics. In Ivory Coast that's $418 per hectare + $250 in fixed costs, and in Ghana it's $ 322 per hectare + $200 in fixed cost[1].
• The productive farm size is based on a viable farm size that can absorb the available family labor, taking into account a 17% reduction for cocoa rejuvenation to be fair[2]. The calculation of required labor per hectare is based on a study from New Foresight[3].
• The realistically achievable yield is set at 800 kg per hectare, based on use of resources and good agronomical practices.
• Other income generated by the farming household through food production, sales of other crops and services is set at 25% of the cost of living[4].

Each year, Tony’s calculates and pays an additional premium called the Tony's Premium that bridges the gap to a living income. And to strengthen farmer organizations, we make additional investments into the capacity of cooperatives.

What's up with all of these premiums? Well, they add up to a living income for cocoa farmers, because the 'farmgate' price of cocoa (the standard purchasing price set by local givernments) isn't enough to create a living income for cocoa farmers just yet.

Take a look for yourself! For the cocoa season of 21/22 the premiums were calculated like this:

Unfortunately, on the 1st April 2021, the official price of cocoa in the Ivory Coast dropped by 25%. The April price drop means we need to increase the total premium we pay from $462 (+26% over farmgate price) to $909 (+68% over farmgate price) per ton to make sure farmers earn a living income.

There you have it, you're now a living income reference price afficianado! But keep in mind that to solve the problems in the cocoa industry, we need to do more than just pay a higher price for cocoa. All of our 5 Sourcing Principles play a critical role in creating a more equally divided supply chain. And it'll take more than just Tony's addressing the problems in the cocoa industry to change it as a whole. Which is why we call on all chocolate companies to make a living income the norm and to adopt this model.

Footnotes
[1] Based on best practice use of inputs and living wage for hired labor (see appendix)

[2] In Ghana the viable farm size is much larger than actual farmsize. Therefore we use a reduced farmsize.

[3] Assessing Living Income from cocoa, New Foresight, 2017

[4] Based on actual farm diversification, e.g. demystifying cocoa (KIT)

[5] For Ghana, Fairtrade calculates the same Living Income Reference Price, based on slightly different parameters. For more background on the model please visit this page.

[6] Average from various sources (see appendix)