The unsustainable Fair Trade business model

Michael Giberson

Colleen Haight examines the past and present of Fair Trade-certified coffee and wonders whether it has a future in “The Problem with Fair Trade Coffee,” published at the Stanford Social Innovation Review. The title probably should have been “Problems,” plural, as more than one problem gets explored in the article.

I’ve argued in the past here at Knowledge Problem that producing quality coffee that consumers are willing to pay extra for will do more for farmer income in the long run than Fair Trade certification. It turns out that quality concerns are among the problems faced by Fair Trade, for more than one reason.

Here is one quality problem: some coffee buyers are willing to pay a premium for high quality coffee that is greater than the Fair Trade premium, and that means better quality coffee is moving out of the Fair Trade distribution channel. Haight explains with a simple example:

[Assume a] farmer has two bags of coffee to sell and there is a Fair Trade buyer for only one bag. The farmer knows bag A would be worth $1.70 per pound on the open market because the quality is high and bag B would be worth only $1.20 because the quality is lower. Which should he sell as Fair Trade coffee for the guaranteed price of $1.40? If he sells bag A as Fair Trade, he earns $1.40 (the Fair Trade price) and sells bag B for $1.20 (the market price), equaling $2.60. If he sells bag B as Fair Trade coffee he earns $1.40, and sells bag A at the market price for $1.70, he earns a total of $3.10. To maximize his income, therefore, he will choose to sell his lower quality coffee as Fair Trade coffee.

More Fair Trade problems are discussed in the article.

Saturday was World Fair Trade Day, help a coffee grower by ignoring “fair trade marketing” and buying quality coffee instead

Michael Giberson

The second Saturday in May has been anointed as “World Fair Trade Day.” If you’re interested in buying fair trade coffee, consider what Lawrence Solomon, owner of the Green Beanery in Toronto, has to say about the fair trade marketing system. (In brief: not a good way to help or even to express care for coffee growers.)

Want more? Try the report of the Institute for Economic Affairs: “New research finds Fair Trade movement is a distraction, not a solution.”

In my view, western consumers cultivating a taste for quality coffees will do more for coffee growers than buying into the fair trade system.

[HT to Mungowitz for the Solomon link, who remarks on the rent-seeking economics that inherently will trouble these kinds of programs, and he also notes Dalibor Rohac’s column on the topic in the New York Post.]

Fair trade for coffee may be good, but…

Michael Giberson

Fair trade for coffee is good, but many readily available alternatives may be better. “Better” as in, better for the producer and better for consumers. I was browsing the website of a local specialty coffee roaster, and noticed the “Ethics” labels on the products: “Premium price” and “Farm Gate”, but not “Fair Trade.” Curious, I thought.

Looking around the website, the “About” page had a clue:

There were some things we were certain about.  … The coffee had to be ethically sourced.  Fair Trade isn’t always so fair, and we strive to make sure that the farmers who grew our coffee were paid at least, but usually more, than the Fair Trade minimums.

The roaster’s blog revealed more: “News: Fairtrade is accused of doing less for coffee farmers than Starbucks.”

The post links to a Gaurdian (U.K) news story discussing a report by the London-based Institute of Economics Affairs. The key problems identified, highlighted in the roaster’s blog post, are: high overhead keeps some of the poorest coffee farmers from Fair Trade certification; Fair Trade is not about quality of products, just price and production conditions; Fair Trade certification works with organizations, like co-ops, but not individual farmers, and Fair Trade premiums paid to the organization may not reach farmers. The IEA report offers more details.

IEA is a free-market leaning think tank, and Fair Trade proponents frequently frame their efforts as morally superior to ordinary market outcomes. One might expect IEA to slam Fair Trade rhetoric. A Financial Times columnist finds that the report “is more nuanced than that.”

[Author Sushil Mohan] accepts that a Fairtrade buyer is, like any other consumer, simply making a choice. “Fairtrade rests as much on market forces as conventional trading does,” he writes. “Fairtrade works not because it subsidises goods no one wants, but because some free market consumers are willing to support it.”

Yet overall, Mohan concludes, Fair Trade seems to be more about catering to the attitudes of western consumers than about improving the lives of coffee producers. Perhaps it yields some good for some producers, but the benefits are surely tiny in comparison to the good that good ol’ free trade is doing for coffee producers. Given that reality, the report suggests there is no reason for school systems or others to succumb to Fair Trade lobbying.

Earlier fair trade coffee commentary at Knowledge Problem: