5 Reasons why we need a new approach to Fair Trade

As you sip your fair trade certified Roobios tea after that hot yoga class, taking comfort in the assumption that you made a difference in the life of the poor farmers, well think again.

Fair Trade has been touted as a panacea for the correcting trade practices so that the producers get a fair price for their goods. However, multiple studies at institutions such as Harvard suggest that Fair Trade certification doesn’t help poor farmers. Let’s take a look at 5 key reasons why:

1. Virtually no impact of minimum Fair Trade price: Fair Trade guarantees a minimum price of $1.4/pound for participating co-operatives which means that when the trading price is lower than $1.4 then buyers guarantee buying the coffee at $1.4. However, through much of the last 5 years the price of Arabica Coffee has hovered above that minimum price. Thus, even without fair trade, the coffee farmers would have made the exact same amount of money as they made with fair trade.

2. Producers are treated as workers not partners: Let’s continue with our coffee example and look at who price of a coffee cup has changed over the last 5 years. Prices of green coffee beans hit a 20 year high of $3/pound in 2011 at which point major retailers such as Starbucks, Dunkin Donuts among others announced price increases. However, within 12 months coffee prices at commodity markets had halved to ~$1.5/pound but this had no impact on the retail price of coffee which continued to remain the increased price. In a nut shell retailers will immediately pass along cost increases to consumers, however cost decreases are neither passed along to customers nor is any relief provided to the farmer.

3. Middlemen continue to exploit poor farmer’s lack of market information: Currently, international trade works as a 4 part process with multiple middlemen taking their pound of flesh. Let’s take the example of how tea is exported from India to other countries. Tea is sold in an auctioning process and is bought by an export agent. The export agent then sells the tea to an import agent in the consuming market (80% of Indian tea is exported). The importing agent further supplies the tea to food-service customers (e.g., restaurants, small coffee shops) as well as small tea retailers. The auction price for Darjeeling tea was $6/Kg, which will be sold at $80/Kg to consumers in the USA.Thus, farmers make less than 10% of the retail price of tea with the rest of the difference pocketed by middlemen.

4. Misaligned incentives leads to poor fair trade quality: As we discussed in point 1, fair trade works on the principle of price floors, however this can lead to poor quality products. Let’s assume that a farmer has 2 bags of coffee, 1 which is good quality specialty coffee and will likely fetch ~$2/pound in the market and the other is poor quality and will likely get $1/pound in the market. Now if there is a buyer only for 1 bag of fair trade coffee paying a minimum of $1.5/pound then which bag would the farmer sell to the buyer — the poor quality coffee one. So while the consumer might pay a premium for the coffee thinking that they are getting great coffee while being socially conscious, actually they may be getting poor coffee. Thus over time people will start relating fair trade with lower quality products and hence may no longer pay a premium for them which will eventually reduce the farmer’s income.

5. Lack of transparency about the end consumer: Fair Trade model has failed to bring the producer closer to the consumer. A recent article by Stanford researchers suggests that when farmers in Indonesia where shown a bag of chai tea, that contained Cinnamon, no one in the group had ever seen it being used as an ingredient and most of them thought of it as inexpensive tea bark. In fact the farmers didn’t even know how much they even got paid for it. Cinnamon retails at $8/pound in most US retail outlets, just imagine the amount of income which can be generated for farmers in Indonesia which produces ~90,000 tons of Cinnamon every year.

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