Voluntary sustainability standards and farmer welfare: The pathways to success?

Whether Voluntary Sustainability Standards (VSS) - such as Fairtrade, GlobalGAP or Organic - may contribute to economic sustainability has been subject to vigorous debate over the past decades. To analyze the welfare effects of VSS for family farms, previous studies rely on single equation models which enable analyzing if (some) VSS affect welfare, but not how (some) VSS affect welfare – or not. Hence, little is known about the mechanisms and the relative importance of these different mechanisms by which VSS contribute to farmer welfare. In this paper, we analyze the channel of effects through which VSS affect net farm revenue, as a proxy of farmer welfare, of family farms in Peru. We use nationwide data from Peru’s National Agricultural Survey covering five years, multiple agricultural commodities, and multiple VSS. We apply a multiple mediation model which allows to disentangle the main revenue-determining mechanisms and to compare their relative importance. We find that prices (and not yields) are the main channel through which VSS affect net farm revenue. However, higher prices cannot offset higher production costs, resulting in zero net revenue gains. We do not find an effect through yields, but identify a large potential effect on net farm revenue. We find heterogeneity in the effects by standard and crop, with crops certified to standards that apply a system of quality-based price differentiation having the largest impact on net farm revenue through a price effect. From a policy perspective, we highlight potential improvements in VSS design to effectively improve economic sustainability.