Undercover Economist

Mind the fair trade gap

‘If fair trade does deliver higher incomes for farmers, it may prove too successful for its own good’

In 2001, the world price of coffee sank to its lowest ebb for decades, threatening dreadful hardship for the often-poor farmers who grow the sainted berry. It was also around that time that fair trade coffee seemed to come of age, with a common certification mark launched in 2002, and the product becoming a familiar sight in supermarkets and coffee chains.

The premise of fair trade is that the disparity between poor coffee farmers and prosperous drinkers presents both a problem and an opportunity. The problem is that farmers often live a precarious existence: geographically isolated and growing a crop with a volatile price. The opportunity is that many western consumers care about the earnings and conditions of the people who grow their coffee, and have some money to spare if only it might reach those people.

Unlike a taxi driver or a waiter, you can’t just tip the guy who grew your coffee. The fair trade answer to the conundrum is a labelling scheme: an inspector verifies that all is well on the farm, with good conditions and a higher price paid for coffee; this information is conveyed to consumers by way of a recognisable trademark, the most famous of which is the Fairtrade logo. It’s an appealing idea — a voluntary scheme that helps people who want to help people. (Or rather, several voluntary schemes: there is more than one fair trade label, alongside diverse certification schemes such as Organic or Rainforest Alliance.) Who wouldn’t want a better deal for farmers who are poor and work hard? But there are problems with the idea too.

The most obvious problem is that this labelling scheme costs money. Flocert, a certification body set up by the Fairtrade Labelling Organization, charges farmer co-operatives €538 merely to apply for certification, plus an initial audit fee of €1,466 even for a small co-op. Cynics might suspect bureaucratic bloat but the costs may well be real. It cannot be cheap to check pay and conditions in some remote Peruvian coffee plantation. But every euro spent on certification is a euro that the farmer cannot spend on his family. And larger co-operatives from richer, better-connected countries are more likely to find it worthwhile to pay for certification. For this reason, economist and fair trade critic Ndongo Sylla says that fair trade benefits “the rich”. That seems too strong; but it is certainly a challenge for the fair trade model to reach the poorest.

A second problem is that fair trade certification cannot guarantee fair trade sales. If coffee importers want to put the Fairtrade mark on their coffee, they must find a Fairtrade certified producer and pay the Fairtrade price, which reflects both a modest premium and a guaranteed minimum price. But importers are not obliged to buy fair trade coffee and may avoid it when it gets too expensive, exactly when the premium is most needed. A study by Christopher Bacon found that during the price slump of 2000 and 2001, Nicaraguan coffee farmers were earning twice as much per pound when selling fair trade coffee as when selling the uncertified stuff. But much of their coffee could not find a buyer at such rates and was sold at market rates instead; as a result, the average price premium, while substantial, was much lower at around a third.

Another study, by Tina Beuchelt and Manfred Zeller, found the fair trade certified farmers in Nicaragua started at a similar income level to conventional farmers and, if anything, slipped backwards. A recent survey by Raluca Dragusanu, Nathan Nunn, and Daniele Giovannucci was more upbeat but still found the evidence in favour of fair trade “mixed and incomplete”.

A final irony is that if fair trade does deliver higher incomes for farmers, it may prove too successful for its own good. If coffee farmers are able to sell more coffee at a premium price, more people will want to become coffee farmers. One possible result is that the market price for uncertified coffee falls and, on balance, coffee farmers are no better off.

As the development economist Paul Collier once wrote, fair trade certified farmers “get charity as long as they stay producing the crops that have locked them into poverty”. It is a telling point. For all the good I may wish the people who make my coffee, a globalised tip jar makes a precarious foundation for their future prosperity.

Written for and first published at ft.com.