The Messy Truth Behind Fair Pricing & Reinventing the Middleman
Grounded co-founder Thekla Teunis describes the profit breakdowns in conventional agricultural systems, and why farmers and producers systematically get squeezed out of the pie. The problem of unfair pricing pervades the value chain; Thekla explains what Grounded is doing to disrupt the status quo.
by Thekla Teunis | edited by Hailey Gaunt
28 June 2021
For many of us, pricing is a mystery. Until we can make sense of the value chain - what happens between the farm and the shelf - we can't begin to understand what is fair for farmers and best for the planet. Credit: Grounded
This is the first blog in our Transparency Series, where we take a closer look at different facets of Grounded Ingredients. Unlike traditional value chains, we are focused on traceability and transparency, working to create a system where everyone involved – from harvester or farmer to brand and customer – understands each step of the journey.
What it means to get a fair price
While working for an organisation called True Price on a project for ethical chocolate brand Tony’s Chocolonely, I first discovered what the average cost breakdown of a chocolate bar looks like. Companies don’t usually disclose how things get divvied up, but Tony’s Chocolonely has the courage to be transparent. It doesn’t look pretty though. The division of who gets what from a retail sale looked like one of the most unfair things I could think of; at first glance it seemed like a prime example of what’s wrong with our food system.
As you can see, the farm gate price (what a producer or farmer actually receives) is 5.1% of the price the consumer pays. Tony's Chocolonely is a company that strives to be fairer to farmers, and therefore pays premiums: 7.2% of what you pay for their chocolate goes directly to the farmer. (And a bit more goes to projects that support the farmers.) A Tony’s chocolate bar costs around EUR 2.89 at a Dutch supermarket. Without adding their premiums, the cocoa farmer would receive EUR 0.15 from the sales; but with Tony’s premiums, the farmer gets EUR 0.2, a significant increase. For more information on these numbers, you can read Tony’s Annual Fair Report.
When I saw this, my first reaction was how cheap it would be for consumers to double the income of farmers. If customers pay another EUR 0.15 for a regular chocolate bar, and that money goes straight to the farmer, the farmer gets 100% above the average rate.
Another thing that struck me was the fact that almost all of the negative impacts we calculated across the value chain in the production of a chocolate bar (from farming to shipping, processing to packaging, etc) occur primarily at the farm level. This is where deforestation happens, where farmers and labourers are underpaid and, in the most extreme cases, where child and slave labour is an issue. You can see these collateral costs on page 20 in this great report by True Price.
'What's that got to do with the price of spices in Tanzania?' When pricing and markets go - as they did in Tanzania - from boom to bust, it's the landscape and the farmer that bear the brunt. Credit: Eric Fishel
Teasing out the costs of an unfair price
With Grounded, we’re working on scaling regenerative agriculture and ecosystem restoration in Africa. We can talk about agricultural techniques and better labour practices and smart ways of building up rural economies, but the one thing that can absolutely help farmers address all these issues – help them take care of their land and their children, and reverse the negative impacts that keep them in a cycle of poverty and soil degradation – is money. And that’s what they don’t get in this system.
My thought was simple: what if we can redistribute value across the value chain, or simply transfer premiums that consumers pay straight to farmers to give farmers higher incomes, and enable them to take better care of their land and themselves?
It sounded easy, but it turns out that making this work is really hard.
Firstly, most companies don’t even know where their ingredients come from. If you pay EUR 0.15 more for a chocolate bar and ask the brand to give that money directly to the farmers who grew the cocoa, the brand wouldn’t know where to turn. In dominant supply chains, there is no way to trace cocoa back to individual farmers.
Then there’s the added complexity that most products are composed of multiple ingredients. A chocolate bar is also made up of milk and sugar and often nuts, which all come from somewhere. So where should your premium go? Dairy and sugar farmers need to be paid fairly for their produce as much as cocoa farmers do. How much should go to which farmer? And how to trace back to all of them?
Grounded Ingredients: a radical new order
Grounded has launched a platform for products that are produced in a regenerative way, Grounded Ingredients. The idea is that brands can source ingredients from producers we know and select, and everything is 100% traceable. Our idea is that if we can capture a premium price from brands seeking regenerative products; we can transfer this earning straight to producers to ensure them a decent income, and give them extra incentive to farm or wild-harvest regeneratively – in a way that allows nature to thrive.
Sounds simple, right? We’re already close to the farmers, so this should be doable. We’re not a brand, and we only sell single-origin ingredients that come straight from producers we know.
Turns out, it’s much more complicated than it sounds. In fact, within Grounded we designed a challenge to solve the fair pricing problem; the best plan would receive a package of delicious Dutch stroopwafels. Team Jenny (our platform manager in New York) and Dani (our financial manager in Cape Town) won with an approach we’re going to test now. I’ll explain to you how.
From the start we knew we needed a solution that’s as simple as possible so it’s easy to communicate externally and to producers. Initially, we thought we would share a fixed percentage of the sales price with producers. In this model, Grounded would determine the best sales price for each product and volume based on our judgment of what the market would pay. Then we would pay producers, say, 65% of that price.
Here’s why this model didn’t work: when the difference between the farmer's asking price and the price at which we could sell their ingredient on the platform is too small, it requires us to push down the farmer's price if we are to cover any of the costs of sale. In other cases, it would mean the farmers could receive a bit more than their asking price. But this would differ amongst different products and also depend on the sizes sold. For smaller volumes, the price that the consumer pays is a bit higher per kilogram than for larger volumes, because our costs of packaging, transport and handling is roughly the same, so it’s more efficient for Grounded Ingredients to sell larger volumes.
As a result, if we’d used this one-size-fits-all model, in some cases producers would receive less than their normal farm gate price; in other cases, they might receive more given that the products vary in market value, and in the volumes offered for sale. We could differentiate the percentages that would go back to producers between various product categories and volumes, but that would make things more complicated. We were looking for simplicity.
Simple is sexiest
We decided to look at it the other way around. What if we structured it similarly to platforms like UberEATS? We simply ask the producers their quoted price, and then add a 35% margin (or so) on top of that. This model encourages the producers to be price sensitive and charge according to what they reckon buyers are willing to pay, taking into account Grounded Ingredients’ 35% margin. And we would never pay them less than the farm gate price. But here we end up with another problem: because the values and the volumes of the ingredients we are selling vary widely, adding a fixed percentage might not work. Some products will be difficult to sell because they’d be too expensive, while others will be sold under their market price and the producers would receive less than they could get elsewhere.
Our solution is therefore slightly more complicated, but hopefully more equitable. We’ve decided that Grounded Ingredients and the producer will share the profit created on the platform for each sale that is made. The producer will receive their farm gate price, plus 25% of the profit of all of their product sales at the end of the month. On Grounded Ingredients, profit is defined as the price of the ingredient, less the producer’s farm gate price and less Grounded Ingredients’ cost of sale. (By cost of sale, we mean our direct costs of selling the product: packaging, transport from the supplier to us, and quality control). We give the producer an estimate of this number, and update it once we have actuals.
A fairer (if imperfect) way
A clever calculator will have already figured out that this means Grounded Ingredients takes 75% of the profit. Yes, we do. And with that, we still run at a loss. The platform is currently so small that our overheads aren’t covered by our sales. We have people building the website, selecting and profiling producers, ensuring brands can find us, and managing our financials and logistics. We need to charge VAT. And we need to scale the platform to make it a viable model in the long run. If the platform expands to include lots of ingredients, the percentage that we need to make per sale in order to run it can decrease, and we can compensate the farmer even better.
Here’s what this looks like in practice on average for all ingredients and volumes we have for sale on the platform:
As you can see in this chart, the producers receive 59% of the price paid on the platform (of which 54% is their farm gate price, and 5% is the kickback on profit they receive). Twelve per cent goes to packaging, transport and quality control, and 14% is used to cover Grounded’s overheads. It means that farmers can get a 10% higher price when selling on this platform – if we can make it work.
We’re going to try. And we’ll keep you posted on how it’s going – it might be that we figure out a better or fairer way to do this. If you have ideas or questions, please feel free to reach out. We’d love to hear your thoughts.