This is the second article in a five-part series that examines three alternatives for the socially responsible coffee drinker:  Fairtrade, direct trade, and Starbuck’s C.A.F.E. program.  There are other labels such as certified organic, Rainforest Alliance certified, and UTZ certified coffee.  If you would like an overview of these and other certification labels for coffee, they are nicely explained in an article entitled  Making Sense of Certification.

The three alternatives to be addressed in this series are major contenders in the specialty coffee market that claim to provide both a fair price for the farmer and environmentally sustainable practices.  Our previous article in this series, Why Do We Need Fairtrade Coffee?, explained how the traditional coffee market originally gave rise to the Fairtrade alternative.  To briefly summarize, after a quota system for controlling coffee supply and price was abandoned in 1989, and Vietnam entered the coffee producing market, supplies increased and prices dropped dramatically.  Mergers and acquisitions created a handful of large transnational corporations that roast and trade the coffee; these large companies were able to survive the decline of coffee prices through increasingly sophisticated investment strategies.  However, the small farmers who produce coffee were devastated by the price drop.  Fairtrade, direct trade, and Starbuck’s C.A.F.E. program all attempt to address this critical problem by offering consumers the option to select coffee produced by farmers who are receiving enough compensation to meet their basic needs.

Fairtrade standards for coffee as well as a number of other products are established by the Fairtrade Labelling Organization International (FLO), a non-profit association that includes 20 labelling organizations, three producer organizations, traders, and independent consultants.  Transfair USA is the member organization of the FLO that certifies products in the United States.  The purpose of FLO standards in the coffee industry is to create opportunity for economic and social development among small farmers and farm laborers who are disadvantaged in the traditional market and to require sustainable farming practices that protect the environment.
 
In order to qualify for the Fairtrade label, small farmers must participate in democratically organized cooperatives that 1) provide safe working conditions, transparency in business planning and use of funds, and a living wage for workers, 2) prohibit child labor and discriminatory practices, 3) invest in the development of the community, for example, by funding health care, education, or training to improve coffee quality or obtain organic certification, and 4), preserve natural ecosystems and promote sustainable farming methods that limit use of agrochemicals and prohibit genetically modified organisms.

Importers using the Fairtrade label must guarantee a minimum FLO-established price or pay the world market price, whichever is higher.  As of July, 2008, the FLO minimum price for washed Arabica coffee was $1.25 per pound plus an additional 10 cents for a social premium and an additional 20 cents if the coffee is certified organic (a certification established by other organizations such as the U.S.D.A. for U.S. imports).  The social premium is intended to cover costs for the community development programs mentioned above.  In addition, importers must offer pre-financing equal to 60% of the contract if the cooperative requests it.  Finally, importers must purchase as directly as possible from producer groups rather than middlemen, such as exporters, international traders, and brokers who have played a significant role in the traditional coffee market.

A number of criticisms have been leveled against the Fairtrade system.  One criticism, most notably expressed in the December, 2006 issue of the Economist, is that Fairtrade will fail to achieve its objective because it ignores basic free market principles regarding supply and price.  The argument runs as follows.  By artificially establishing a minimum price for coffee, Fairtrade will cause producers to grow more of it to take advantage of the higher price.  However, this increased supply of coffee will cause the price on the traditional market to fall, thereby creating a worse situation for farmers who are not participating in Fairtrade.  If the problem with the traditional market is that prices are too low, then the appropriate response is not to create a price support, but rather, to allow market forces to run their course, meaning that coffee growers who are unable to make a living under current conditions should diversify and grow other crops or seek other options for their livelihood.
 
I believe this argument is flawed for the following reasons.  It is important to recognize that there are significant differences between the Fairtrade minimum price and other forms of price support that interfere with free trade.  For example, consider the difference between Fairtrade minimums and U.S. farm supports, which are sustained through political influence rather than consumer choice.  American farmers in Midwestern states have had sufficient political power to assure that their Senators sustain farm subsidies.  These subsidies allow U.S. farmers to sell their products on the global market at such low prices that farmers in other countries, such as Mexico, cannot hope to compete, and many have lost their farms as a result.  If the subsidies were dropped, that would undeniably create serious difficulties for American farmers, but chances are good that most would find alternative means of surviving in the American economy and that they would be in a better position to meet their basic needs than are Mexican farmers who are currently losing their farms because of the subsidies.  Therefore, if these price supports were dependent upon consumers choosing a label certifying that farm products are U.S.-made, chances are slim that consumers would buy them out of a sense of social responsibility.
 
By contrast, consumer demand rather than political influence is driving the support for a Fairtrade minimum price.  This is similar to paying a bit more for a product that tastes better, only in this case, consumers are choosing to pay a bit more for a product that allows producers to meet basic needs and protect the environment, something we all depend upon.  The Fairtrade product is different from the traditional product.  When consumers choose the Fairtrade label, they are increasing demand for Fairtrade coffee, not traditional coffee.  Therefore, coffee farmers will be interested in increasing their supply of Fairtrade coffee only.  The supply of traditional coffee should not increase, and therefore, the price should not decrease.
 
The free trade advocate might respond that as consumers switch to Fairtrade coffee, the demand for traditional coffee will decline, and this will cause a decrease in the price for traditional coffee.  However, as demand increases for Fairtrade, more farmers will see the value in Fairtrade, seek certification, and convert from traditional coffee production to Fairtrade production, thereby decreasing the supply of traditional coffee as the supply of Fairtrade increases.  As demand for traditional coffee drops (creating pressure toward a price decrease), so should supply (creating countervailing pressure toward a price increase).  The liklihood of this scenario is indicated by the fact that currently, coffee farmers in the traditional market are lined up and waiting for Fairtrade certification.  In order to obtain certification, cooperatives must demonstrate that there is a market for their product, so the supply of Fairtrade producers can expand only as fast as consumer demand for Fairtrade.

Finally, let’s consider the free market argument that if the price of coffee is too low to make a living, coffee growers should diversify and grow other crops instead.  That might be a viable alternative if farm supports in northern countries were dropped, allowing coffee farmers to convert, for example, to corn production.  However, until that happens, diversification is not a realistic option for most.  Rather, under recent market circumstances, the low coffee price has forced farmers into extreme poverty, migration to urban slums, and illegal migration to the north.  Where crop diversification takes place, it often involves conversion to narcotics such as khat (Ethiopia) and coca (Columbia and Peru) because these are the only viable alternatives.  In fact, Fairtrade is a more likely path to economic diversification because it creates conditions that make diversification possible, such as education for children, training in running local businesses, and higher incomes that can support them.

A second criticism of free trade coffee is that it is failing in its promise to provide assurance that producers are being paid well and are protecting the environment.  In 2006, the Financial Times reported several incidents in Peru in which laborers working on Fairtrade certified farms were being paid below the minimum wage in violation of certification standards.  It also reported that at least one Fairtrade association had been illegally farming in protected national forest and that the Fairtrade label has been falsely applied to some coffee beans that were not Fairtrade certified.  It is unclear whether these cases are anomalous or widespread.
 
This is fundamentally a criticism of the Fairtrade inspection process.  Fairtrade inspection is carried out by an independent organization called FLO-Cert which is responsible for insuring that the certification process is credible.  FLO-Cert audits the organizations that seek Fairtrade certification, reviewing documents and conducting on-site visits and interviews. The Financial Times report calls into question whether these inspections and on-site visits are sufficiently frequent and thorough to maintain the credibility of the Fairtrade label.
   
This problem is related to a third criticism of Fairtrade, namely, that it is too costly.  According to the 2006 certification fee schedule (the most recent published on the Transfair USA website at the time this article was written), coffee roasters pay 10 cents per pound for certification of Fairtrade coffee.  Producers pay $2500 to $10000, depending on the size of their organization, to cover costs for inspection and certification, with discounts of up to 35% for very small groups and a 10% discount for groups that are already certified organic.  These producer fees were not charged until 2004, but became necessary as applications for certification increased and FLO saw a need for more frequent inspection.  Consumers are sometimes disillusioned to learn that the entire amount they are paying for the Fairtrade label is not going to farmers.  However, it is not possible to offer frequent and reliable inspection of remote farms without incurring costs.
 
Geoff Watts, the Director of Coffee and Green Coffee Purchaser for Intelligentsia Coffee, points out that without the burden of certification costs, specialty coffee roasters can buy directly from farmers and pay them a higher price than that offered by Fairtrade.  We will consider this “direct trade” alternative in more detail in our next article.  At this point, let’s acknowledge that Fairtrade is faced with the ongoing problem of balancing opposing demands to maintain the reliability of its certification label on the one hand and to keep certification costs down on the other.

Watts makes a fourth criticism of certification programs like Fairtrade—that they lack flexibility and fail to reward coffee quality.  He argues that the Fairtrade model works well for entry-level specialty coffees and attracting large retailers to the “ethical coffee” fold, but that it fails to pay farmers a premium price for higher quality coffees capable of fetching $20 or more per pound on the retail market.  In this respect, he believes that direct trade roasters are better than Fairtrade at cultivating relationships with specialty farmers and helping them to produce high quality coffee for which they will receive a price 25% or higher than that offered by Fairtrade.  Again, we will consider the merits of the direct trade alternative in our next article.

Fairtrade is an evolving model.  It must meet ongoing challenges that include not only the problem of maintaining reliability, keeping costs down, and rewarding high-quality producers, but also encouraging farmers to take a more active role in management of their cooperatives and effectively using the social premium paid by Fairtrade to create programs that will benefit the community.
 
Nevertheless, there is plenty of evidence that Fairtrade is creating substantial benefits for farmers and has been much better for them than the traditional coffee market.  In 2003, the Colorado State University Fairtrade Research Group reported the results of research on seven case studies assessing the impact of Fairtrade on Mexican coffee cooperatives.  It found that Fairtrade was helping farmers.  They were receiving double the price that conventional growers were receiving, even after deductions for cooperative management and other expenses were taken into account.  This guaranteed price along with lower-cost credit available through Fairtrade allowed cooperatives to better plan for coffee production as well as family and community needs.  Access to training enabled them to improve their coffee quality and learn organic farming as well as sustainable methods for improving soil fertility, conservation, pest management, and harvesting techniques.  Cooperatives provided economic assistance to help families cover medical expenses, improve their children’s education, and learn to develop alternative sources of income such as artisanry, community pharmacies, bakeries, and improved production of alternative grains.  Communities were able to purchase fuel-efficient stoves to reduce smoke-related respiratory problems and deforestation caused by the use of wood stoves.  The study concluded that although there are a number of problems confronting Fairtrade, “Even the doubters involved in this study acknowledge that once the evidence from all the case studies is combined, the range of benefits is wider and more significant than previously imagined” and that “The most fundamental concern expressed by producers is the limits of the market in the North” (27).  In other words, the biggest concern that farmers had was that they need greater demand from consumers for Fairtrade coffee so that they can sell it.

While Fairtrade coffee is not without its flaws, it does a much better job than traditional coffee at serving farmers and the environment.  But is it better than direct trade or Starbucks’ C.A.F.E. certification?  That will be the subject of our next three articles.