Annette Pacey and Ali Mansour
November 13, 2007
Does buying Fairtrade coffee help to redress the injustice of the world trading system and give producers in the developing world a better deal? The worldwide Fairtrade movement claims it does, but critics argue that it perpetuates the very problem it aims to solve, ripping off consumers for good measure. Is Fairtrade really the ethical choice for consumers?
The Fairtrade movement aims to use consumer choice to give a better deal to commodity producers in the developing world. Often, small producers of commodities such as bananas and coffee find themselves entirely at the mercy of wildly fluctuating prices for their produce on the world market. In 1995, when a severe frost in Brazil destroyed much of the coffee crop, world coffee prices boomed; by 2001 they had fallen to a 30 year low (Milford, 2004). For the many coffee farmers living close to absolute poverty, rapid and drastic decline in prices ruthlessly jeopardises their already dire living conditions (ibid).
Concern in rich countries for the plight of third world producers led to the idea of Fairtrade labelling. Consumers in the rich ‘North’ could choose to support farmers in the poor ‘South’ by paying more for a product which carried a guarantee that the farmer had received a premium on top of the market price for his or her produce. The system works by certifying producers who meet Fairtrade requirements according to standards laid down by the Fairtrade Labelling Organisations International (FLO). Fairtrade certified products are guaranteed both a minimum price for their produce, plus a premium which must be invested in local development projects.
By guaranteeing a minimum price the system aims to give producers economic independence and control over their lives. The minimum price is calculated to take into account the costs of sustainable production. The essential objective of this method of pricing is to protect the farmers should world prices fall below the cost of production. The premium above the minimum price aims to empower producers to improve their communities through additional funding of development projects. The Fairtrade logo aims to function as a guarantee to consumers, assuring that they are contributing to the social and economic development of the producer by buying the product.
The Fairtrade foundation gives the example of a banana producer called Alfredo Martinez in the Dominican Republic. Previously restricted to the local market, Alfredo suffered from wildly varying prices and his family was at times driven to starvation. Since he began selling his bananas to the Fairtrade export market he has enjoyed a guaranteed and regular income, leaving him much more secure. Alfredo is part of the Juliana-Jaramillo group of farmers which have been certified Fairtrade producers since 1996. The group meets annually to decide how to spend the premium paid on top of the Fairtrade price. Recent projects have included the provision of toilets and improved housing for local people. The Fairtrade foundation claims workers on larger plantations also benefit from the scheme, because Fairtrade farmers can afford to compensate their workers with higher wages and provide them with benefits like sick pay.
Despite its noble aims, the Fairtrade movement is not short of critics. The Economist is quick to point out serious concern over the economics of Fairtrade, namely the problem of overproduction. Fair trade minimum prices aim to rebalance the ‘injustice’ of low prices, but the critics assert that this policy fails to recognise the underlying foundation of the problem: that prices are low because there are too many producers.
Coffee production gives an example of how this can happen. Coffee trees take two years to mature and then produce berries for up to 40 years. The unusual time span of this crop means that it is impossible for farmers to adjust production levels in accordance with demand and price (Milford, 2004). Price elasticity of demand is also low, which means that demand for coffee does not decrease significantly when prices rise. Unexpected frosts or disease can therefore cause significant price booms which encourage farmers to enter the market. Two years later when the trees mature and there is an oversupply of the product, prices once again drop. As the cycle of price of fluctuations continues, farmers are increasingly marginalized in an uncertain market (ibid).
Paying producers above the market price is effectively a subsidy which prevents the price signal from reaching the farmers. This actually encourages new farmers to start producing coffee, driving prices down further. This situation will severely degenerate the welfare of farmers who function outside of the Fairtrade system. On the other hand, if everyone were to join the Fairtrade production scheme, the organisation will no longer be capable of sustaining the artificially evaluated prices, causing the entire system and its dependent farmers to collapse. In this sense the fair trade premium actually worsens the problem it aims to solve.
The Fairtrade movement is often subjected to this criticism. The websites of the Fairtrade foundation and the FLO attempt to address this concern in their FAQs. The Fairtrade foundation dismisses the claim that the fair-trade premium necessarily increases production. Instead, it argues that it gives farmers other options, such as diversifying away from producing the crop, or investing in quality improvements. But why would a guaranteed higher price encourage a farmer to stop producing, and why bother improving quality when your price is guaranteed? The FLO argues that Fairtrade is a market-based model, not a subsidy. Producers only receive a premium if there is a buyer willing to pay it, and many farmers within the system continue to sell to the regular market as well.
The more serious critiques of the Fairtrade system focus on its misguided efforts, which are exclusively concerned with containing the symptoms of a much more fundamental problem of exploitation. Fairtrade products are verified through a thorough certification process. As such, they demand a certain level of competence and cooperation from the local governments of the countries in which the organization is active. The problem is that farmers who are most marginalised and subjected to exploitation in trade, are in extremely poor countries where the basic level of governance fails to meet the minimum standards required by Fairtrade to implement their system. Therefore, the Fairtrade organization is more likely to move its operations to a slightly less poor country ,such as Costa Rica instead of Guatemala, where the system can be installed effectively. In this manner, not only does Fairtrade not address the root of the problem but does more damage by shifting its business apparatus from dirt-poor countries to poor countries, further isolating farmers in extremely improvised environments who do not have the systematic capabilities to comply with the Fairtrade model.
Another criticism is that Fairtrade products do much more to benefit retailers than producers. While the Fairtrade premium can double a coffee producer’s income, the extra cost of Fairtrade coffee to the retailer can be less than a penny per cup (Harford, 2006). The consumer is led to believe that the extra 10p or so they pay for Fairtrade coffee is going to the coffee grower when in fact almost all of it goes directly to the retailer (ibid). FLO acknowledges that retailer premiums are a cause of concern, but predicts that as the demand for Fairtrade products increases and competition between retailers intensifies disproportionate retailer margins will become less significant in future.
So how fair is that Fairtrade cup of coffee? There seem to be real benefits for coffee growers like Alfredo Martinez who get a higher price for their coffee, but the real problem is that too much coffee is being produced. A guaranteed price encourages new farmers to start producing, and prevents farmers from getting out of coffee production when it is not profitable. The benefits to individual farmers of getting a Fairtrade premium need to be balanced against the potential harm of encouraging more farmers to grow a product which is overproduced. Consumers should be cautious about the Fairtrade guarantee and bear in mind that if anyone is getting a better deal, it is not always the poor farmer.