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.