Proposal – True Price Analysis of

Voluntary Sustainability Standards and

Climate Smart Agriculture in coffee
production in Colombia
Objectives
Coffee production is associated with environmental and social externalities.
Environmental externalities are costs that infringe on the natural resources,
capital and communities of people living close to production locations or to
future generations – examples include water pollution and the use of scarce
water and toxic materials. Social externalities are costs that directly affect
the conditions of workers and producers in the value chain and sometimes
of local communities. Underpayment (of employees) and underearning (of
small entrepreneurs) are the most important examples.

In the coffee value chain, these externalities primarily occur at farm level.
Producers are the most vulnerable by the externalities. Assessing the true
price and true ROI can help Solidaridad and its partners to develop better
incentives, better sourcing and investment strategies for the coffee supply
chain in Colombia

This report aims to assess Colombia coffee production from a societal cost-
benefit perspective. More specifically, this analysis will focus on the cost-
benefit relation between a selected set of Good Agricultural Practices that
are promoted by Voluntary Sustainability Standards and are considered as
part of the practices integrated into Solidaridad´s approach to Climate Smart
Agriculture in Colombia.

Secondly, this analysis will look into the (True) Return on Investment of
investments in the Good Agricultural Practices and Climate Smart
Agriculture.

Better insights into all costs of production (both financial and external)
enables investments to target higher impacts and reduce the investment
risks associated with coffee production. The development of this cost-benefit
driven approach requires an extensive and quantified analysis of
sustainability.
Five criteria in cost-benefit assessment
We propose five criteria that should be met to validate the belief that
investments in CSA are an important element towards a better coffee sector:
a) It is sustainable. The approach should be effective in reducing
externalities, both of social and environmental nature
b) It is contributing to a decent livelihood for the farmer. Smallholder
farmers, whose livelihoods are under severe pressure, should see
their household income increase, preferably towards making a
living income.
c) It is feasible in the marketplace. Coffee prices are very competitive.
The CSA approach should not lead to higher prices, unless this can
be clearly related to a higher-quality product
d) It is profitable to the farmer. If investments are required to make
the switch to CSA farming, the investments should be under control
and generate sufficient profit per dollar invested
e) It is cost-effective to society. The investments should not only
benefit the farmer, but also provide benefits to nature, by providing
large natural capital benefits per dollar invested

The true price as a tool to quantify sustainability, ability to provide a

livelihood and feasibility
In order to score CSA on the five criteria, we will perform various
quantitative analyses. Part of this can be done using traditional financial
techniques. For instance, a financial model of a farm can assess the farmer
income. If this is above the living income for CSA farmers, and below for all
realistic alternatives, CSA clearly meets the ‘livelihood’ criteria.
Other elements require quantifying the externalities of coffee production.
This is in the first place necessary for the first criteria (sustainability) but also
for the last criteria (cost-effective to society). In this report, we calculate the
true price of CSA coffee and alternative production systems. True pricing is a
way to quantify the external costs of production. It functions to give
comparable and clear insights into the environmental and social effects to
society.

The true price of a product is defined as the sum of the market price and the
external environmental and social costs. The last two elements constitute
the so-called external costs.
 Calculating the true price provides:
 An overview of all external costs of coffee production. As such, it
serves to test sustainability;
 An assessment of farmer income, as ‘underearning’ is part of one of
the social external costs – A production system has underearning
only if entrepreneurs earn below the living income. As such the
calculation includes a test of whether decent livelihoods are
provided for;
 The value for the market price. This helps to test the feasibility
criteria.

The (true) Return-on-Investment (ROI) as a tool to quantify sustainability

and cost-effectiveness
In order to test the fourth criteria, profitability, we will calculate the ROI of
investments in VSS and CSA and in alternative production systems. The ROI
of an investment shows how well an investment financially pays off. In order
to test the last criteria, cost-effectiveness, we calculate the true ROI of
investments in CSA and in alternative production systems. The true ROI is an
extension of the classical investment concept of ‘Return-on-Investment’ and
provides an indication of how well an investment pays off from a societal
perspective.

This learning initiative will allow Solidaridad and its partners with true pricing
to measure, compare and boost their investments in sustainable and
resilient coffee supply chains.

Solidaridad and its partners have helped across Colombia smallholders with
Description of the project
interventions to make their farms both more sustainable and resilient. To
scale the interventions, it is important to know what the exact impact of past
and current interventions has been and what additional effective
interventions exist or are needed. Solidaridad and its partners aim to further
empower smallholders and enable them to improve their capacity to adopt
sustainable practices.

Solidaridad would like to quantify the benefits of sustainable coffee

production in Colombia (CSA and VSS) versus conventional coffee
production. Based on the results of this analysis we will be able to contribute
to a better insight for different actors in how the transformation into a
sustainable coffee sector can be realized:

 For procurement professionals, it provides a way to compare the

costs and benefits of different production systems and thereby
source products with lower external costs;
 For investment officers, it provides valuable data to better control
and to reduce the risks associated with investments in coffee at
farm level;
 For producers and their farms, the true pricing and true ROI allow
for the optimization of resource efficiency and the reduction of
production costs;
 For providers, it helps to adapt existing inputs and services and to
 develop new ones that reduce the (external) costs for farmers;
 For roasters, retailers and sellers, this framework enables the
improvement of the measurement and communication of the social
and environmental performance of their coffee origins.

Research on existing information in Colombia:

Components
 Calculation of benchmark based on secondary data
 Calculation of environmental and social external costs based on
primary and secondary data sets
 Sensitivity analysis of the true price
 Selection of improvement levers to be analyzed
 Assessment of improvement levers
 Analysis of True Return on Investment in CSA coffee model
 Analysis of True Return on Investment in VSS coffee model
 Comparison of investment per production model (national
benchmark, regional conventional, regional CSA, regional VSS)
 Comparison of benefit per production model (national benchmark,
regional conventional, regional CSA, regional VSS)

Final report containing the following chapters:

 Concept
 Context analysis
 Study methodology
 Results True Price analysis
 Results true ROI analysis
 Recommendations for the use of True Price for pricing decisions by
stakeholders of the value chain
 Recommendations for the use of True ROI for investment decisions
by private funds, multilateral financial institutions, governmental
entities, producer organizations and other stakeholders of the value
chain

Area of execution Colombia (Cauca and Huila)

Execution timeframe 5 months (interim report after 2.5 months): April- August
Team Solidaridad:

Joel Brounen – Project Leader. Role: Project Design and Administration.

Carlos Isaza – Field Coordinator. Role: Operational coordination and liaison

with partners.

Francisco Bustamente – Agricultural Engineer. Role: Financial Analyst

Jackeline Londoño – Agronomist. Role: Socio-Economic Analyst

True Price:
 Adrian Ruiz – Position. Role

Reinier de Adelhart Toorop - Position. Role

Beneficiaries profile Producers, traders, impact investment funds
Required support by Data on costs, inputs and impacts of interventions in the selected regions
partners
Budget Personnel Solidaridad 34,400 USD

Trueprice 36,000 USD

Colombia Workshop Analysis Workshop 1,200 USD
Publications and Publication Final Report + 2,680 USD
documents Presentation (during SAFE
meeting)
Other activities Webinar with SAFE partners 380 USD
TOTAL: 73,700 USD