Why direct payments are more effective for combatting poverty than fair prices

• Paying higher farmgate prices after harvest generates an essentially different impact for rural farm-households than periodical direct payment programs. • Voluntary certification initiatives for tropical commodities deliver modest welfare improvements to smallholder farmers. • Direct payments through (un)conditional cash transfers by companies show promising social outcomes and behavioural change responses. • Differences in institutional design, organization and implementation determine to a large extent the effectiveness of farmer support programs. • Hybrid interventions that rely on a careful mix of price support with income transfers are likely to be most effective for rural poverty alleviation. Voluntary certification initiatives for tropical commodities intend to reduce rural poverty by guaranteeing higher prices to local smallholder farmers and paying premiums to their local communities. These market-based strategies are important to support farmer organization, but the effects on household income and food security remained fairly modest. Reforms of market mechanism are necessary but usually not sufficient for supporting smallholder farmers. Novel initiatives relying on regular direct payments by companies that provide cash transfers to smallholder families show more tangible impact on improvements in their livelihoods. We compare the theories of change underlying fair trade programs and direct payments initiatives through regular cash transfers and assess the evidence regarding their impact. Direct payments turn out to be more effective because of their focus on female recipients that give priority to expenditures oriented towards household consumption and resilience. Moreover, lower transaction costs for their delivery by companies contribute to the success.