Spilling the Beans on Fairtrade Coffee

By Delany Higgins

For today’s conscientious consumers, there exist many product labelling schemes to convey information about items’ origins that might not otherwise be apparent. For example, the ‘organic’ label (in the EU) indicates strict limits on antibiotics, bans on pesticides and GMOs, and other rigorous standards. The ‘Fairtrade’ label differs from most labels signalling production method; while it does have certain criteria for labeling, it also signifies the inclusion of a price premium specifically intended for the benefit of farmers in developing regions.

Since its inception, however, Fairtrade has proven to be an inefficient system for transferring resources to poorer producers, and where it does succeed in doing so, mainly benefits those in more diversified and relatively better-off developing economies. Its long-term value to both consumers and producers is more likely in the information it conveys about method of production, not in the extra premium it ostensibly conveys to producers. 

Source: Fairtrade International/Nathalie Bertrams

With increased consumer concern about the environmental and social harms concealed by opaque supply chains, Fairtrade products have risen in popularity.  In 2017, global sales of Fairtrade topped US$10 billion.  Fairtrade labelling began in 1988 with the Dutch organisation Max Havelaar, named for an eighteenth-century literary character who opposed colonial exploitation. Similar organisations proliferated internationally, and united in 1997 to form Fairtrade International.

Organisations are certified if they meet social criteria including cooperative organisation, non-discrimination, wages at or above the national minimum wage, collective bargaining rights, and prohibition of forced and child labour. The environmental criteria include sustainable waste management, minimisation of agrochemicals, and prohibition of GMOs. In return for certification, producers are eligible for a price floor and ‘social’ price premium, relative to the New York Coffee Exchange commodity price of coffee.

The price floor is meant to protect producers in the event of a commodity price dip, and the social premium is intended as a humanitarian benefit, enabling the aforementioned community investment and welfare improvement. Fairtrade also introduces producers to a wider range of markets, somewhat like a professional networking organisation. The stated mission of the organisation is

‘to support a better life for farmers and farm workers in the developing world through fair prices, community development, and environmental stewardship… all farmers and farm workers benefit from premiums that allow them to invest in building their communities and bettering their lives’. 

Fairtrade International
Source: De Janvry et al., 2012

Effectively, beyond simply adding the value of supply-chain transparency to the product, the system seeks to use the market to transfer resources from wealthier consumers to poorer producers and their communities.

Fairtrade labeling was founded specifically for coffee, which remains the central product of the system, although the label now applies to many other commodities. Coffee currently accounts for 46% of the total premium paid out, and 48% of all Fairtrade producers. Most studies of the system have focused on this particular commodity.

Source: Fairtrade International/Thanksgiving Coffee

Whether the benefits of the price premium for Fairtrade coffee actually reach these producers, however, is questionable. Multiple studies have found that only a small fraction of the higher price paid at the counter for Fairtrade goods makes it back to the original farmers. Some have calculated that the actual Fairtrade benefit to producers has averaged 2.4¢/lb, despite the price premium averaging 25¢/lb. Other calculations have put the number even lower, at 3¢ for every $1.00 above the non-Fairtrade price at the counter. 

Beyond the impacts of certification costs, this discrepancy occurs because not all coffee certified as Fairtrade can be successfully sold at the Fairtrade price premium. Only about 12% actually is. So the certification costs for most of the coffee certified are not recouped. Further, in times when the global commodity price of coffee drops, the price floor and social premium become more attractive to producers, leading to even more certification, and an even lower proportion of Fairtrade coffee actually being sold at the theoretical Fairtrade price. Were far more consumers to choose Fairtrade coffee, a greater proportion might be sold as such, but even with rising interest that does not appear to be nearly the case. For aiding developing communities, charitable donation is, per-dollar, still more effective than the social premium in achieving the premium’s stated objectives. 

Source: NYTimes/Ken Gilbert

While the premiums convey very little of the price differential to the original producer, they do still generate some benefit to the farmers and their communities. These benefits, however, tend to be concentrated in the relatively better-off regions of the developing world, due to the greater accessibility of certification and administrative costs to relatively wealthier and larger-scale producers. The recent split of Fair Trade USA from Fairtrade International was over this issue, with the latter limiting the size of certifiable producers.

Yet certifications have still been found to have a bias towards Latin American producers, who tend to already have better living standards and market access than those in other regions, such as Central and Eastern Africa, and Southeast Asia. What benefits do reach producers have also been found to stay at the higher levels of the farm or cooperative, not reaching unskilled workers. Fairtrade might benefit these workers more by focusing on its standards of certification, rather than the size of the premium targeted to producer communities (with the caveat that this could make the label slightly less accessible). 

Fairtrade certification has certainly conferred many benefits on the communities in which its certified producers live. The social price premium, however, is a cost-ineffective way of furthering its own humanitarian aims; direct aid is still more effective. Rather, the value of the certification will be similar to that of other labels, in the reliable information it conveys about the environmental sustainability and labour standards of the product’s origins. In future, Fairtrade may best serve producers through increasing the desirability of their products by providing solace about opaque supply chains to increasingly conscientious consumers.

The opinions expressed in this article are the author’s own, and may not represent the views of The St Andrews Economist

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