Confessions of a Fair Trader

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Coffee is the economic lifeblood of many indigenous communities. As with any primary cash crop, it can provide meaningful income or it can lock the growers into an unbreakable cycle of poverty. The fair trade movement has great potential to support the goals and aspirations of indigenous peoples throughout the coffee lands. But there are certain dynamics of trade and business culture that inhibit the movement from reaching its potential.

Cooperatives and Indigenous Peoples

Fair trade helps small-scale coffee farmers organize into transparent, democratically run cooperatives. This form of organization allows the people to act in a united fashion for social, political, and economic issues, and provides stronger bargaining and efficient collective use of resources. Thus, the cooperative format closely parallels traditional structures of decision-making in indigenous societies and is supportive of cultural cohesion. Indigenous cooperatives from Peru to Sumatra have assisted their members to produce a better crop and receive higher market prices for their coffee. This is accomplished through workshops and field assistance in the technical aspects of coffee preparation (including organic production), joint marketing, and direct export to increase the value that stays with the farmers. Cooperatives also have pooled their fair trade premiums during the good times to buy upstream processing facilities, thereby bringing a greater percentage of coffee dollars back to their communities.

Yet farmers recognize that coffee farming is not a way out of poverty, and that it can actually contribute to the destruction of local culture and sustenance. “For the past 80 years, coffee has provided an income for farmers in this region,” said Jaime Hernandez Balderas, marketing director of coffee cooperative CEPCO in Oaxaca, Mexico. “At the same time, it has displaced traditional agricultural practices which had always supported the family and the community, and which were an integral part of the culture.” To counter this disintegration, coops work in a variety of ways to reestablish local autonomy and self-control. They often provide pro-bono legal assistance for members to defend their lands and protect their interests, and act as advocacy groups on the regional and national levels to obtain better infrastructure (roads, bridges, electricity) and social services from the state and federal governments.

Cooperatives also have been vehicles for grassroots development aimed at the health and economic welfare of their communities. Several have started their own bank and credit unions to provide members with loans for coffee production as an alternative to the rapacious local financial system of banks and coyotes and for income generation outside of coffee. CECOCAFEN in Nicaragua funds microenterprises through its member cooperatives, where the women of the communities raise pigs, chickens, and other livestock for sale to their communities. Projects of the Ashaninkas members of Pangoa Cooperative in Peru include a commercial honey enterprise, as well as flower-growing for use in local religious festivals. The members of Mut Vitz in Chiapas seek a return to traditional practices in food and herbal medicine for their families and for local sale, as a means to restore their threatened indigenous socio-economies.

For indigenous coffee farmers, cooperatives have been a means of regaining a measure of autonomy in an export-oriented economy where the dynamics are contrary to indigenous survival. Yet, the economic and social gains of any year can be swept away by a steep fall in world coffee prices. To what extent can the fair trade pricing system offer an alternative to the vagaries of the world market?

Money Matters

There are two main elements to fair trade pricing, as currently structured. First, the price itself: fair trade offers a floor for the bad times of $1.26 for one pound of conventional and $1.41 for one pound of organic coffee, and a five cent premium over the C price when the C, plus local premiums, exceeds the floors. Second, fair traders are supposed to provide prefinancing for up to 60 percent of a coffee contract whenever requested by a cooperative. But do these pricing elements live up to their promise?

Fair trade pricing clearly offers a meaningful safety net during the hard times. The C plunged as low as 45 cents during the last five years. For many communities faced with coffee prices less than the cost of growing, harvesting, and processing coffee, this safety net kept farmers from going further into debt, losing their land, or being unable to feed their families.

But during more settled markets, as we are beginning to experience again, the fair trade price may be only a few cents more than or the same as the prevailing market price. There is a question of how much more money fair trade actually brings in to a community. Daily C-market swings of a few cents create the bizarre situation that on Monday, paying $1.41 is a fair price, but on Tuesday, when the C price rises above $1.41, it is not a fair price. This fluctuation allows some roasters and importers who have not entered the fair trade marekt to claim that they pay more than the fair trade price at times—a confusing claim that misleads the public. Also, most fair traders allow the farmer to set the fair trade price they will receive against the C any day within 30 days of when they are scheduled to ship a container of coffee. A bad call can result in the coop actually getting less money from a fair trade contract than they would have on the commodities market if they had waited for the next days’ C price. One company has tried to mitigate this by using the 30-day average C as a base, which at least dulls the spikes of the market.

The larger question is whether pegging the fair trade price to the C market will ever make a significant difference in the lives of farmers. The C price is not based on the cost of production, reasonable profit, or community need. It is based on the speculative behavior of commodity brokers in New York and London, who bet on whether there will be a frost in Brazil or a hurricane in Indonesia. It is a system divorced from the realities of the farmers, although supply and demand do play a role in price movement. Fair trade, as currently structured and administered, will never be more than a band-aid, for it supports rather than challenges the dynamics of colonial trade that underlie the world coffee market.

There is a nascent movement to create direct trade relationships based on actual costs and reasonable profits for both sides of the transaction, but farmers are reluctant to move to any system that might offer less than the C does at any given time. Brokers fear paying too much when they might get a better deal on a lower C market. Breaking the dependence on the known, no matter how it abuses or fails the participants, is often the most difficult challenge of any social movement.

Prefinancing is almost as important as price, according to many farmers. If farmers have to borrow money locally to cultivate, harvest, and process their product, the interest rates are usually high and often eat up any premium gained from fair trade. Prefinancing from organizations such as the Massachusetts-based green investment firm EcoLogic allows some coops to give money to their members well ahead of the ultimate sale of the coffee. This is often critical, as families can run out of money several months before their crops ship north and payment is released. Most fair trade guidelines require that companies make prefinancing available when cooperatives request it.

For companies whose business is 100 percent fair trade, prefinancing is a standard part of doing business and has made a significant impact in the farmers’ communities. But among mainstream coffee companies whose fair trade purchases count for a large percentage of the fair trade market but only constitute a small portion of their own business, prefinancing is the least honored aspect of fair trade. Even though these roasters and retailers tout prefinancing in their literature, many of them rarely make it available. Most importers and roasters do not want to pay $40,000 or $50,000 for a container of coffee up front, tying up cash or risking a loss if the cooperative does not deliver. TransFair members are required to offer prefinancing when farmers request it, but many farmers are afraid to ask for fear of losing a sale.

Uses and Abuses

Although the fair trade system was meant to enhance farmer incomes and restructure trade relationships, abuses and misuses of the system can inhibit the movement from delivering on its promises.

The level of commitment that some fair trade-certified companies have to the movement is questionable. In order to become licensed in the formal fair trade system that began in Europe and has spread to the Americas, all a company has to do is sign a contract stating that when it buys fair trade-certified coffee, it will pay a 10 cents-per-pound licensing fee to TransFair and report the transactions on a quarterly basis. There is no commitment for the company to buy one, 10, or 50 percent of its coffee under fair trade terms, nor any commitment or incentive to increase its percentage of purchases from year to year. As a result, many large coffee companies with meager commitments to fair trade use the fair trade logo and language generically in their advertisements. This marketing misleads the public into believing that all of that company’s coffee is fair trade, or that the company as a whole is certified fair trade, when in reality, only individual purchases are certified. Consumers believe that more is being done to help farmers or to change the system than is actually occurring, and have a false sense of the strength and depth of the fair trade movement.

The standard response of many companies to why only a small percentage of their products are fair trade is (1) lack of quantity of fair trade coffee, (2) lack of quality, and (3) lack of consumer demand. None of these arguments withstands scrutiny.

Only about 20 percent of coffee that is eligible for fair trade is actually sold with a fair trade label. Many importers bring in fair trade-eligible coffee under conventional terms, paying farmers the conventional price with the promise that if they are able to sell it to roasters at the fair trade price, they will send the additional premiums back to the cooperative after the sale. This practice is known as “retrocertifying.” It has helped some brokers sell fair trade coffee, but because the coffee is only reported as fair trade after the sale, it also allows some companies to claim that there is not enough fair trade coffee available. In fact, enough fair trade coffee is produced for even the largest roasters to increase their purchases significantly.

As for the issue of quality, this argument may have been true years ago, but it has long since been put to rest. Fair trade coffees regularly win first place at international tasting competitions. Most committed fair trade companies also consider quality essential when purchasing coffee and have had no trouble maintaining their high standards.

The “consumer-driven” issue is also difficult to understand. If companies put out material stating that there is not enough quality or quantity in fair trade, it sends consumers a message that the company is doing its best, so they will not ask for more. In addition, if companies use confusing or misleading advertisements about their level of fair trade purchases, consumers believe that the company is a “fair trade company” already, and have no incentive to demand more.

There was a movement last year to have Transfair USA list all licensees by pounds of fair trade coffee sold and by the percentage of their total sales that number represented. Equal Exchange, Dean's Beans, Peace Coffee, and Cooperative Coffees made up this “fair trade working group,” which represented at the time about one-half of all fair trade coffee sold in the United States. Transfair USA refused to provide the information or even to ask the licensees to reveal it, citing “corporate confidentiality.” It seems incongruous that in a movement that demands transparency by the farmers, a similar demand is not made of the companies—especially when those figures would give consumers a fair and complete picture of a company’s commitment to fair trade thereby strengthening their capacity to make a reasoned choice.

In some cases, companies claim they are paying at or near the fair trade prices, but those prices actually go to a broker, who takes its fee and pays the exporter, who takes its fee and so on. The actual money going to the cooperative ends up far below the fair trade price. Again, why would consumers ask for more when they believe these companies are already doing so much for the farmer?

In more sinister instances, fair trade has been used as a tool to deny farmers the benefits of the system. Farmers in Colombia and Peru have reported that exporters will offer to buy one container at fair trade prices, but will offer less than the established C market price for four or five other containers. So while the one container is technically fair trade and can be marketed as such, the net effect on the farmers is no greater income than if they had sold all of their coffee under conventional terms. It is difficult to know if this is widespread, but the same story from two different countries using two different exporters is significant. The effect of this is to cut the impact of the fair trade premium to the farmers. Similarly, some farmers report that exporters are raising fees for processing and handling to recapture some of the fair trade premium from the farmers.

A Critical Look Ahead

No system is fool-proof and all social justice movements should constantly re-evaluate their strategies and structures. Among the participants in fair trade, some companies will always find loopholes that will allow them to keep their financially privileged positions and capture new markets. The real question is how the fair trade movement responds to these abuses. Does it or can it take meaningful action to close loopholes or punish transgressors? So far, the answer is no. Part of the reason lies in the voluntary nature of the system; there is an expectation of ethical behavior and truthful reporting, but no meaningful mechanism to report and punish transgressors.

There also is a clear lack of will on the part of some of the movement’s regulators to hold the larger companies accountable for fear of alienating their biggest financial supporters. But the truth is that the movement for trade justice will never become more than a small commitment and marketing boon for the big companies without a more serious push by the fair trade community. Is the goal of fair trade to have every roaster use five percent fair trade coffee, thereby dooming the other 95 percent of farmers to deepening debt? Or is the goal to transform the world coffee market into a more just system of trade? Can fair trade evolve beyond being a palliative for the mainstream C market? These are the fundamental questions that must be asked of the movement itself if fair trade is going to contribute significantly to the economies and survival of indigenous coffee growers.

Dean Cycon co-founded Coffee Kids, an international development program for coffee-growing families, in 1987. He founded Dean’s Beans in 1994.

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