1. Purchased directly from small farmers organized into democratically run cooperatives
  2. Guarantees a floor price when world market prices are low
  3. Offers farmers advance prefinancing (credit) to help cover harvest costs
  4. Develops long-term trading relationships between importers and farmer cooperatives

Most coffee retailers sell Fair Trade Coffee at a premium. Why? Because customers are willing to pay more for a socially responsible product. The more expensive cost is only a small fraction of the price hike.

In North America and Europe, we have all kinds of regulatory agencies (Dairy Council ect.) that ensure that our farmers get paid enough, so why shouldn't that happen in developing countries as well?

Coffee is currently one of the most popular fair trade products, although why this should be so is unclear. It is probably a combination of the facts that coffee is a luxury good that people are willing to pay more for as their pocketbooks allow, and that farmers are highly motivated to get an edge in a competitive and risky market.

Regardless of why it might be popular, there are good reasons that coffee should be the target for fair trade initiatives. Coffee plants take about four years before they start producing coffee berries, and six years before they reach max production. This means that a farmer must be able to invest a significant amount of money without expecting a payout for at least four years. Moreover, the crop is fairly useless if you cannot sell it; grains, beans, tubers, and even bananas can provide substance for a farmer if the market is poor; coffee is ridiculously lacking in nutritive value. And finally, coffee can be grown in the shade (good for species diversity)1 and organically without too much trouble, but only if the proper incentives are given.

In the 70s, 80s, and 90s the world coffee market was in a constant state of disarray, with prices slumping and finally plummeting when the US raised its trade embargo against Vietnam2, allowing cheap Robusta beans to flood the market in the mid-90s. Many coffee farmers found that their crops no longer produced a living wage, and the plight of the poor peasant farmer starving while producing a luxury crop for the Wealthy Nations hit a chord with the Wealthy Nation Consumers.

The fair trade movement is a confused mess, but the basic theory is that in exchange for (paying for the use of) the Fair Trade label, a roasting/export cooperative/company will buy beans from a farmers' cooperative at a) a set minimum price or b) 20 cents above current market value, whichever is highest3. There is very little tracking of where this fair trade premium is spent, although it is strongly encouraged4 that it be spent on projects run through the co-ops that will benefit the local farmers and/or communities. There is no guarantee that any of the money will make it to the farmer in the form of profit, although it is common for the co-ops to provide farmers loans to help them expand and improve their operations, which should ideally lead to more profit in the future.

There are two primary objections to fair trade coffee. The first is essentially what I already stated -- that the whole thing is an under-regulated mess. There is no guarantee that fair trade growers will make more money than they would otherwise, nor even that they will earn a living wage. This is in part due to the number of people dipping into the extra funds for fair trade coffee, in part because the extra fees only need to go to 'the right sort of programs', and in part because there is often poor planning on the part of the farmers' co-op; a co-op may decide that all of the farmers should be growing organic coffee (for example) without having enough information to predict if the decreased yield will be offset by higher prices -- and given the difficulty in predicting market prices 4-6 years in advance, this is no surprise. Between the poor monitoring, the poor policing of what can be monitored, the poor planning, and the inherent risks of entering the coffee market, it is far from certain that any reasonable percent of the cost of fair trade coffee is doing what you want it to do... if you even have a clear concept of what that might be.

The second objection is an economic one. If the fair trade model is viewed as an economic safety net for underprivileged farmers, then it is not clear that it will do more good than harm. One of the great benefits of fair trade is touted to be that it is set up to provide the farmers with security in the face of falling coffee prices; even if market prices fall, fair trade farmers will be guaranteed a minimum price. But farmers guaranteed a good price are naturally inclined to increase production. This is good for them, but the flip side is that if market prices fall, any coffee growers who are not signed up with a fair trade co-op are screwed, trying to sell their coffee in a super-saturated market.

While many of these objections apply to goods other than coffee, coffee remains a favorite case study. Unlike local crafts, increased consumer awareness does not mean increased consumer consumption; unlike most food crops, surplus becomes essentially worthless; and because of the rather extreme start-up costs, much of the aid provided goes just to getting the farmers entry into the market rather than profits. Fair trade coffee does have some advantages, particularly that it is more likely to be environmentally friendly. If fair trade is seen as a way of incentivising Earth-friendly farming practices, it is a fairly effective program. And if we are being honest, fair trade is a way of keeping the supply of coffee steady by subsidizing a sizable segment of the producers. While this can be framed as helping the producers, it would be dishonest to pretend that it doesn't help the coffee drinkers just as much, and perhaps more.



Footnotes:

1. Shade Grown, Organic, and Bird-Friendly certification labels are technically a separate issue from fair trade certification, although most fair trade coffee will also be one or more of these.

2. The U.S. embargo on Vietnam was lifted in February 1994. Vietnam's farmers quickly started ramping up bean production. Market prices were very volatile until they started to level out in 2004, in large part due to the help of the Vietnamese government.

3. Current minimum as April 1, 2011 is $1.40 per pound for washed Arabica and to $1.35 for Arabica naturals. Current 'Fair Trade Premium' over market price is $.20 per pound, or $.30 for certified organic beans. (From the Fair Trade USA site).

4. Fairtrade International has mandated that five cents out of the 20 cent Fair Trade Premium must be invested in quality improvement programs at the farm and/or cooperative level.



Refrences:
The Global Exchange's Coffee FAQ
Fairtrade International
Fair Trade USA
Time Magazine - Fair Trade: What Price for Good Coffee?
Wikipedia: Fair Trade
Blogspot - Coffee Futures Trader: Coffee futures: an historical perspective
Wikipedia: Fairtrade Certification

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