Oct, 2012

Beginner's Guide to Fair Trade An introduction and overview.

by Rizwan Tayabali

Contents

Fair Trade in Context .................................................................................. 3

What is Fair Trade? .................................................................................... 4

Fair Trade vs Fairtrade ................................................................................ 4

Issues with Fairtrade .................................................................................. 5

Benefits of Fairtrade Certification ................................................................. 7

Impact of Fairtrade .................................................................................... 8

Fair trade alternatives to Fairtrade ............................................................... 9

Conclusion .............................................................................................. 10

Disclaimer: My experience with fair trade is limited to interviews and interactions with a small number of projects applying the fair trade approach. Much of what you see in the document therefore is a simplification of second hand research. Use it as an introduction and overview, but I fully recommend checking the facts and issues through your own follow up investigation.

Fair Trade in Context

I first came across fair trade while I was working in Mexico, through organisations like Fairtrasa and Cafe La Selva. In Mexico agriculture employs 18% of the labour force compared with 2-5% in industrialised nations, with extreme poverty in rural communities at about 27.9%. Almost three times the number found in urban areas. To understand what this means in real numbers, in Mexico alone there are around 6 million small producers who sell their products in the local market at very low prices.

The ‘producer’ in the food pipeline is the grower, not the processor or seller that the consumer engages with. This is the back breaking labour end of the chain. The way the global system works, the grower typically receives a tiny fraction of the price you pay for any food, and, as a tiny and often lone voice, is always being bullied to provide it for even less. Hence the extreme poverty of many farmers in the developing world. The vast majority of what you pay goes to bigger players further up the supply chain, all the way from processing to packaging to retailing.

Globally almost 2.5 billion of the Developing World’s 5.5 billion people work in agriculture, mostly in rural areas, which gives you some idea of the numbers of people labouring to grow the food we eat. It also gives you some idea of the number of people at risk of poverty in the mass drive to pay as little as our leverage allows.

Rural farmers in developing countries are thus among the most socially vulnerable people. While working to feed the rest of us, many of them do not actually earn enough income for their own needs. This is compounded by the fact that being rural typically increases the distances and costs of access to basics like schooling, health-care, food items, and household goods.

Most of these farmers operate small independent land holdings, or work as hired or indentured labour. They are rarely organised into trade unions or have access to effective forms of social security or financial protection. As a result, many of them are employed under poor health, safety, and environmental conditions, with high levels of debt.

Fair trade is one of the movements looking to address this problem.

What is Fair Trade?

It is a consumer driven market-based approach that empowers farmers to get a fair price for their harvest, helps workers create safe working conditions, provides a decent living wage, and guarantees the right to organise.

It does this by developing and ensuring standards both at the growing end and throughout the supply chain. It finances this by typically charging a higher price to the consumer than market equivalents. The aim is that a fairer amount reaches the farmer at the bottom not only as direct income, but also in the form of quality of life enablers like voice, education and health-care.

The ideal fair trade model follows a three pronged approach

1. Fair price

2. Sustainable product which protects environment

3. Tailored producer empowerment

Fair Trade vs. Fairtrade

The fair trade movement is driven by a number of different organisations and approaches, the biggest and best known of which is a coalition that formed the Fairtrade label in 1997. The other major fair trade bodies include the World Fair Trade Organization (WFTO), Network of European Worldshops and European Fair Trade Association (EFTA), as well as a number of faith based entities like the CRS (Catholic Relief Services) Fair Trade mission.

So, the first really important thing you should know is that fair trade as a concept and Fairtrade the entity are two different things. I myself hadn’t realised this distinction.

However by investing millions in billing and marketing itself as THE certifier of fair trade practices, much of what we know and see of fair trade is defined by the Fairtrade’s Labelling Organisation’s (FLO) policies and approach. For a sense of scale, by 2008, products certified with Fairtrade International's Fairtrade certification amounted to approximately $4.98bn worldwide; with the sector as a whole growing at 30% a year as the trend towards conscious and responsible consumption continues.

In case you wonder why Fairtrade products are more expensive than non-Fairtrade equivalents, it is that the price is based on two main elements

1. A guaranteed minimum price Set by the FLO and paid to the producer, this is ostensibly meant to cover costs of sustainable production, typically higher than standard market price. The trouble of course is that ‘sustainable’ is a fluid concept, and the price is set in consultation with all the various parties in the supply chain, rather than being based on a local definition of poverty or financial independence. The price therefore has different levels of benefit, if at all, for producers in different countries and environments.

2. An additional Premium This is paid to a Cooperative (not farmer), to be invested in social projects for producer communities. The trouble is that while some of the premium does go towards socially useful projects, there is no monitoring or accountability over how much of it is spent on local operations like the intermediary cooperative, rather than accruing directly to the farmer, so it is really difficult to judge if the premium is being used to its real potential or if it is simply disappearing into the production line to cover the increased costs of compliance with Fairtrade standards.

Another thing to know is that the Fairtrade label only applies to a select small number of products, due to the time it takes to develop the certification practice, and also presumably due to the ease of working with that particular farming model. As of now FLO rules cover artisans and farmers who grow coffee, tea, cocoa, bananas, sugar, honey, rice, flowers, and cotton.

The fair trade concept on the other hand applies to any and everything that involves vulnerable production labour, so a lot of other forms of fair trade focus on artisan and craft products too.

Issues with Fairtrade

The most common anti-fair trade discourse stems from the “Free Trade” proponents. A slightly misleading name for groups who want no interference in the pricing environment. These parties are of course always on the profiteering end; further up the supply chain where the real profits accrue and who would prefer to reduce their costs as far as their buying power and leverage will enable. This is the free market. The differential between market price and Fairtrade is often cited as unsustainable because it isn’t defined by the open market. However the simple fact that consumers buy Fairtrade products on scale means that it is in fact a viable form of market pricing and indicates that social

outcomes have their own financial value to consumers, over and above the direct value of the product itself.

Unfortunately a major issue with the fact the Fairtrade label markets itself as the only trustworthy verifier, means that other fair trade supply chains lose out even if they are in fact doing a better job of supporting the farmer or artisan.

As mentioned earlier, the Fairtrade label is essentially a certification mark provided by the FLO umbrella group and competes with various other ethical labels like Utz. Coffee is the biggest Fairtrade commodity, falling into the category for the specialty coffee market, specifically the growing ethical niche. Since coffee is the second the second most traded global commodity after petroleum, you can imagine the size of even a niche coffee market.

The specific mechanism that Fairtrade uses to address poverty is called a price floor. This sets a minimum price for a product. For example in March 2011, FLO fixed a price floor of $1.40 per pound of green coffee beans. FLO also indexes that floor to the New York Coffee Exchange price, so that when prices rise above $1.40 per pound for commodity, or non-specialty, coffee, the Fair Trade price paid is always at least 20 cents per pound higher than the price for commodity (basic quality) coffee.

Note however, that this does not mean 20 cents higher than the actual price of specialty coffee, which in today’s market is often significantly more than 20 cents higher than commodity coffee. Selling highest grade coffee to Fairtrade buyers looking to pay the Fairtrade price can therefore mean that growers lose out on this deal, which incentives them to only sell their lower grade coffee through the Fairtrade cooperative they belong to. This is actually one of the key reasons why the quality of Fairtrade coffee is considered to be inconsistent.

Talking of cooperatives, in order to qualify for the FLO label, a key selection criteria is that producers must belong to a democratically run cooperative. The idea being that these are key to the empowerment of the independent farmer, providing a union-like type of collective bargaining power that enables cooperative leaders to negotiate pricing for their individual members.

The implication here is that the Fairtrade label goes around setting up these cooperatives, and investing in their development until they get to the point of certifiability, but this is not the case. The cooperative must be formed at the local level and then, depending on whether it meets selection criteria, can apply or be selected for certification. The result is that reasonably well organised groups of farmers make the selection. By definition, the collectivisation and capability required to apply and meet FLO criteria, means that they are already better off than the individual illiterate farmer. Things get worse when you see

that with coffee for example, only cooperatives of small landholders qualify. The poorest farmers are actually itinerant labourers with no land holding at all.

The overall effect is that Fairtrade improves the situation for a better off grade of farmer rather than the extreme poor, and most disenfranchised in the supply chain. This is not to say that this ‘better off’ group is well off. Many here are still below the local poverty line, and so the interventions still have value. However, the presentation is a little disingenuous, and the approach is argued to have a damaging effect on the most vulnerable.

The latter point may seem counter-intuitive but it is an outcome of what’s called the honey-pot effect. Due to its certification and recognition, Fairtrade cooperatives are more likely to attract responsible buyers, access larger scale markets, and receive aid from a number of other organisations ranging from Aid Agencies, Donor Countries, Governments, and NGOs; pulling resources towards their group at the expense of others. Since this group is typically better off to start with (due to the requirements of qualifying for Fairtrade) this means that non Fairtrade farmers (vast majority) get an even worse deal overall, as resources they need are diverted towards these cooperatives. Until the Fairtrade model is adjusted to include the poorest farmers, it cannot be presented as true fair trade. It’s more a case of fair trade for some, not fair trade for all.

Benefits of Fairtrade Certification

For those who do qualify, aside from profitability related to stable minimum pricing, there are a number of other advantages for producer cooperatives to join Fairtrade’s system, primarily driven by the size of the markets it continues to open up.

• Access to bigger buyers like Nestle and Starbucks • Opportunity for pre-financing i.e. part payment before the growing cycle

rather than all at the end of the harvest cycle. • Contracts that allow long-term planning • Increased access to export markets

Beyond financial value, Fairtrade’s model also creates various forms of empowerment value for small farmers

• Standards protect basic rights according to the International Labour Organisation conventions. These include health and safety, freedom of association, collective bargaining; and look to prevent discrimination, bonded or illegal child labour.

• Democratic decision making and local collectivisation helps workers gain leadership, communication and project management skills.

Impact of Fairtrade

It turns out that the claim that ‘Fairtrade guarantees a fair price for the producer’ is apparently not supported by any real evidence. There are various case studies, usually carried out by the Fairtrade label itself, and some good examples of happy producers, but few proper impact studies. Impact studies require the use of control groups to ensure that an impact is the result of the intervention being studied, which is difficult with Fairtrade for a number of reasons. On one hand because Fairtrade farmers and cooperatives are typically selected from the better and more efficient holdings, and also because non-Fairtrade farmers may be harmed by Fairtrade as explained previously.

Another reason for poor impact data is that there have been virtually no base period studies to determine the position before a cooperative joined Fairtrade, so it is seldom possible to claim that the farmers in a cooperative are better off or have more self-esteem because of Fairtrade. You could argue that it is rather because Fairtrade only certifies efficient cooperatives with educated, efficient, better-off farmers, although it is of course all relative here! The huge amount of marketing that essentially suggests that only products with the Fairtrade label are in fact fair trade also means that the market can end up discriminating against people who uphold the values of true fair trade, but who happen to be part of bigger farms, or just don't want to join a cooperative, and thus do not fit the organisational criteria even when they bring greater benefits to their workers.

As most of the extra money paid by consumers is taken by firms in consumer countries or is spent on added costs incurred in meeting Fairtrade standards, it is also seldom possible to identify direct financial benefit to farmers, and the studies concentrate on non-money benefits, like improvement in self-esteem.

The minimum price being higher than market also doesn’t necessarily mean that producer is making more profit as they have to compensate for the increased costs of complying with Fairtrade production practices. For instance, when Fairtrade encouraged Nicaraguan farmers to switch to organic coffee, it resulted in a higher price per pound, but a lower net income because of higher costs and lower yields.

It is also important not to be fooled by percentage based numbers. Small producers often earn well below the poverty line, so increasing their income by even 20% doesn’t really do a huge amount to change their circumstance. The real money accrues further up the chain, primarily to intermediaries trading, processing and selling to consumers.

The most painful part of the whole model however is that very little of even the extra money you pay as premium actually reaches the farmer. It

seems that the Fairtrade Foundation does not monitor how much extra retailers charge for Fairtrade goods, and retailers almost never sell identical Fairtrade and non-Fairtrade lines side by side, so it is difficult to know how much they are profiting from their association with Fairtrade, or even how much of that reaches the producers. Research by Kilian, B., Jones, C., Pratt, L., & Villalobos, A. (2006) apparently shows that US Fairtrade coffee is typically charged with $5 extra as premium at point of retail, but only 2%, that’s 10 cents of it, gets to the exporting cooperative.

Fair trade alternatives to Fairtrade

Various organisations and cooperatives on the other hand have recognised the intractable limitations of the Fairtrade model and are looking at better alternatives of fair trade altogether. As intimated by the fact that the real money and profits accrue further up the supply chain, they advocate the transition of producer cooperatives or other community entities up the vertical chain. Helping develop them from grower through to processing and retailing.

In 2009 in Mexico for example a coffee producer could get 25 pesos a bag in the free market, up to maybe 30 pesos through Fairtrade, but being part of a cooperative that is directly selling to consumers returns somewhere in the region of 130 pesos per bag. What this means is that transitioning producers into shareholders up the chain is a critical aspect of addressing their poverty.

Café La Selva is a great example of a Mexican coffee producer cooperative that is doing just that, taking coffee all the way from growing to market and the whole community is benefiting massively as a result. In 1979, the coffee-farming Tojolabales and Tzeltales communities of Chiapas joined up to found Unión de Ejidos de la Selva, which now has around 1600 members, all small-scale coffee producers. They started out as just growers, but realised that the real value was further up the line, and moved to link directly to market via their own brand Café La Selva.

Today they have independent control, and instead of earning money just as raw material, they are earning much more as a consumer brand. They are putting this money to social impact like training, infrastructure, cafeterias, education, and identity papers (often rural children have no papers and thus are not officially citizens). They also have a special intelligence unit where they have a council that identifies social problems and figure out where to put the money. This is a group that used to have nothing. Based in the middle of the jungle with no hospitals or schools, and now they look after themselves.

Conclusion

Fairtrade is a good place to start the journey, as it helps embed the standards and operating practices needed for community organisation and empowerment, but until the various global entities recognise the need to support the transition from producer to consumer brand, the model will always be limited in its ability to really transform the lives of farmers and artisans.

In conclusion, support the Fairtrade label but don’t believe all the hype. If ethical consumption and human transformation means something to you, keep your mind open to other forms of ethical trade. Help pressure Fairtrade to use the premiums you pay to help push local governments to implement fair minimum wages and petition importing countries to remove unfair tariffs. At ground level, pressure Fairtrade to help cooperatives set up processing, packaging and brands that will turn producers into shareholders of consumer facing end products, which is where the real money and progress lies.