70% of the world coffee production is produced by small coffee farmers. You get a small portion of the money that goes into the industry. Faced with this situation, “Fair Trade” aims to support growers to make coffee production more profitable.
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What is fair trade?
Fair Trade is a business strategy that puts people and the social, economic and environmental sustainability of society at the center. In addition, Fair Trade also aims to create a culture of responsible consumption.
Fair trade gives organized small producers direct access to the market under fair and just conditions. In addition, it is intended to ensure that employees in agriculture and crafts find appropriate working conditions, with the focus on respect for human and labor rights.
To know how to apply this model to the coffee industry, you first need to know the value chain. Who are the actors involved?
How does the coffee get to the consumer? coffee value chain
The coffee producers sell to trading companies located around the world that deal in a variety of commodities, including coffee. For example Olam International, Louis Dreyfus Group and Volcafe .
These traders deliver the green coffee to the roaster in the buyer’s country. There the beans are roasted. Further production steps such as grinding, mixing or further processing can follow. The coffee is then ready for sale to the end consumer.
The market for ground coffee is oligopoly in nature, ie only a few companies sell it, so they can control sales and price as in a monopoly. These are strong brands that manage to fetch high retail prices.
The coffee is then sold in retail stores. In other words, they are multinational companies that share production processes with other companies in other regions to save money.
After all these work steps, the individual coffee farmer can no longer be evaluated and his remuneration can no longer be broken down.
What difficulties do small coffee farmers face?
More than 20 million coffee farmers produce around 70% of the world’s coffee. They usually do this on small plantations of 2 to 5 hectares.
Since each farmer or family produces only very small quantities, coffee production is usually not very profitable and investments in machines or other equipment are often difficult. In addition, it makes no sense to roast the coffee after harvesting, since roasted coffee quickly loses quality (taste). Green coffee, on the other hand, can be kept much longer and is more resistant to external influences.
The coffee chain progresses from millions of pickers to a smaller number of companies involved in roasting and grinding, and finally a handful of large companies account for a large percentage of global coffee sales.
Impact of the 1983 International Coffee Agreement
The coffee trade was shaped during the Cold War by the International Coffee Agreement (ICA), which gave producer countries the opportunity to set quotas in order to stabilize prices at a high level. In other words, finding a balance between the amount of coffee exported and consumed so that the selling price of coffee remains competitive. This was to ensure that high demand for coffee was not fully satisfied, leaving the market price higher.
At the same time, a fund to promote coffee consumption was set up. Potential buyers lose interest easily given the high prices, but around $100 million was invested for propaganda purposes to encourage the purchase of coffee.
According to a 2004 study, the AIC was in practice an instrument for the transfer of resources to the producing countries allied to the western world. Because of this, about half of the total coffee revenue went to these producing countries, but most of it went to the national governments and associations rather than to the coffee growers.
The AIC collapsed in 1989, which meant an income drop of up to 85% for the producing countries. Since then, coffee prices have become more volatile.
Fair trade in the coffee industry
The Fairtrade system allows consumers to make a kind of donation to farmers by purchasing a specific package of coffee marked with the Fairtrade seal.
This type of product purchase is a growing trend, driven by coffee buyers’ increasing interest in the impact of coffee consumption beyond the end consumer, i.e. the growers. Because most coffee farmers are families living in extreme poverty.
Fairtrade encourages small farmers to organize themselves into sales groups known as cooperatives. This allows them to cut out the middlemen or set a competitive price, as well as purchase equipment to grind or roast the coffee.
How much does fair trade coffee cost?
Companies or organizations that buy coffee from small producers have to pay a fixed minimum price, regardless of how much the world market price falls. Values are $1.40 per pound of coffee and $1.70 per pound of organic coffee. These prices remain above market prices, which average $1.11.
The difference is no more than 60 cents for organic coffee and 29 cents for regular coffee, but it can mean a difference of more than $1,500 for a smallholder household whose annual income may be as little as $4,500 excluding any incentives.
The buying companies also pay a surcharge of 20 cents per pound of coffee. A farmer selling a 200 pound load of coffee should get $280 and another $40 for a total of $320.
Where does the additional income from fair trade go?
It is envisaged that this income will flow directly into a community fund of the cooperative members, who will decide how the funds are to be used. However, at least a quarter of the funds must be invested in improving productivity so that farmers can earn more income in the long term.
In addition to pricing rules, Fairtrade requires buyers to sign long-term contracts and pay upfront before harvest.
Since 1998, the sale of Fairtrade coffee has generated more than $600 million in financial benefits for farmers, including $200 million for community funds.
Standards covered by the Fairtrade organization
The fair trade labelling Organization also strives to be actively involved in the following aspects of coffee production. At the same time, they can contain evaluation elements that decide whether to continue or leave a cooperative.
- Organizational details
- environmental issues
- use of fertilizers
- working conditions
- Child labor
Origin of the Fair Trade seal
During the 20th century movements for a “fair trade” in smallholder incomes emerged. In 1988 “Max Havelaar” was founded in the Netherlands, which is widely recognized as the first Fairtrade labeling organization.
Other organizations such as TransFair Germany, Trans Fair USA and Max Havelaar France followed Max Havelaar. They founded the non-profit organization Fairtrade in 1997 labeling Organization International, which sets standards not only for coffee but also for other raw materials.
Please note that Fairtrade does not buy, roast or sell coffee.
In order for packaging to receive the seal, all links in the production chain must be certified by the Fairtrade organization.
Benefits of Fairtrade coffee
The various studies that limit Fairtrade to a purely economic perspective, with theories and visions specific to this area, conclude that Fairtrade cannot be profitable. However, other studies indicate that the adoption of Fair Trade has been beneficial to communities.
A 2018 study found that the social premium (the extra 20 cents per pound of coffee) earmarked for community investment could solve problems in delivering public services to coffee-growing communities. The premium can be used, for example, to finance schools, infrastructure such as processing plants and the training of farmers.
An example of this is Costa Rica, where regions with certified cooperatives have higher school enrollment rates.
Access to food
Fairtrade also provides participating families with a higher level of food security. This takes into account the intentions of some families to emigrate.
The additional income also represents a support or alternative to government programs that aim to reach the most vulnerable populations but sometimes fall short.
Environmental Impact and Fairtrade
The economic incentive that Fair Trade offers to small farmers enables them to continue growing coffee in an environmentally responsible manner.
Thanks to Fairtrade, small farmers invest time and energy in maintaining infrastructure systems that limit erosion on their coffee plantations. Other measures include improving water filtration and improving habitat diversity for birds and wildlife.
This is all part of the FairTrade commitment to respect the environment. Undermining the ecosystem or not preserving it can result in the loss of certification.
The challenges of Fairtrade coffee
Contrary to the notion popular with consumers, the Fairtrade system has fundamental weaknesses or challenges.
Ensuring that most of the production is FairTrade
While the cooperatives sell their coffee at a higher price per pound, there is no guarantee that all production is sold as Fairtrade coffee. Farmers sell between 20 and 30% of their production under this label.
This means that while coffee pricing is aimed at protecting small farmers and guaranteeing them a better income, the reality is that the volumes traded vary depending on the behavior of the global coffee market.
For example, FairTrade expects a farmer to receive an additional $1,500 per year. However, the farmer has not exported enough due to insufficient demand, so that the target is not reached due to the market dynamics.
According to a 2010 study, fair trade can fail when it pretends to be “on the market and not trading at the same time”.
Real impact of the extra money
Other studies from the same year even conclude that the extra money generated by Fairtrade coffee has no impact on farmers’ incomes, as the problem isn’t low prices, but the low productivity of small farmers.
The impact of Fairtrade on farmers’ lives seems so small that many of them don’t even know they belong to a certified cooperative.
The Fairtrade Minimum Price Guarantee, which has remained virtually unchanged since the movement’s inception, is not reaching producers and has lost value due to inflation. In some cases, the amount they receive doesn’t even cover their production costs.
Disproportionately high costs for FairTrade seals
Since 2004, the farmers who belong to FairTrade cooperatives have paid the organization audit and license fees. These fees are usually based on the size of the cooperative, but are not proportional to the quantities produced or sold.
As the sale of coffee is still adjusted to market dynamics and the percentage of the harvest sold under the FairTrade label is less than 50%, participation in the organization for a large cooperative that does not produce as much as expected and sold only 10% under seal, represent an unjustified cost overrun.
Fairtrade USA: Rebellion or Integration?
Originally, the Fairtrade coffee label was limited to small producers. To broaden the scope of Fair Trade, Fair Trade USA wanted to make certification accessible to plantations, ie large farms that depend on labour.
The organization rejected this idea, and Fair Trade USA split off in January 2012 and pursued its Fairtrade initiative for All”, which focuses on growth and includes large coffee plantations.
Although they are now separate institutions, they continue to function in much the same way. Even the minimum price for coffee is maintained.
Fair Trade USA actually recognizes the Fairtrade certification, meaning the Fair Trade USA farmer base includes all cooperatives certified by the original organization as well as the Fair Trade USA certified plantations.
Fair Trade remains in the dynamics of a broad global market and within the Fairtrade organization there are two ways of conceptualizing the initiative.
One aligns with the Fairtrade USA cause of developing Fair Trade through the inclusion of more and better businesses, while the other focuses on and supporting smallholder farmers.
These tensions between wings of the movement, whether or not dedicated to analysis and decision-making based on market dynamics, have led to differences over FairTrade ‘s strategies and long-term goals.
Involvement of large companies
Because transnational companies such as Starbucks, Procter & Gamble and Chiquita are structurally price and profit oriented, their motivations for entering Fairtrade trading are fundamentally at odds with those of Fairtrade committed companies such as Equal Exchange Coffee or the Day Chocolate Company.
How much more expensive is Fairtrade coffee?
In general, coffee brands prefer to introduce new certified products rather than putting the Fairtrade mark on existing products.
For this reason, the price comparison between the two versions of coffee is not correct. However, we know we need to add a little more than a dollar.
On Amazon, for example, you can buy regular coffee for around $13.5 for a 340g pack, while the same amount with the Fairtrade seal costs around $15.
Here you can see how much more expensive Fairtrade, decaffeinated and organic coffee is compared to regular coffee on Amazon.
Activism driving Fairtrade coffee
Activist consumer groups are an important platform for educating shoppers about “unfair trade” and increasing demand for Fairtrade products.
Campaigns and protests by NGOs like Global Exchange are also exposing the practices of companies like M&M/Mars, which have not yet eliminated the use of slave and child labor in the cocoa harvest for their chocolate and have so far refused to participate in the Fairtrade program.
Activism can also be an important counterbalance to the power of corporate interests of large companies wishing to enter the Fairtrade system.
Vigilance of citizens to monitor Fair Trade
Fairtrade can be seen as a social movement. However, the entry of large companies that primarily have commercial interests and want to use Fairtrade as a tool to improve their corporate image can lead to a clash of two opposing points of view.
So citizen oversight is also necessary to protect the integrity of the Fairtrade system and the label itself.
Their goal is to identify and hold the Fairtrade organization accountable when they award their seal to a company whose corporate interests outweigh those of the small farmers.
In this way, they can prevent the label from being captured by the companies and used indiscriminately.
By buying Fair Trade products, we as consumers undoubtedly help create important social benefits for farmers and support a more affordable market alternative.
more people become aware and committed to fair trade , more producers and communities will have access to these benefits.
Unlike the price set by Fairtrade, the world economy is not static. Despite Fair Trade efforts, many farmers around the world still struggle to make a living.