ACORN International Fairtrade Report


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ACORN International Fairtrade Report

  1. 1. Un-Fairtrade Organization How Fairtade Fails the Global Poor Melanie Craxton & Wade Rathke ACORN International — New Orleans, Louisiana P: 504-302-1238 x2002 E:
  2. 2. Un-Fairtrade Organization | 2 Introduction At first glance, Fairtrade (the organization, not the concept) looks like a great way to empower marginalized producers and workers. With guaranteed prices, financing and social premiums to play for, it is easy to see why, on the surface, Fairtrade is an attractive club to join. However, this report digs deep into the ins-and-outs of Fairtrade to find that the organization is seriously failing to live up to its potential. In fact, it will be found that at its core, the structure of Fairtrade itself is extremely flawed. Fairtrade is meant to answer the call for greater equity in trading relationships by the developed world’s consumers as well as empower the developing world’s producers. However, in the end it is the retailers, especially the market-driven ones, who are the real beneficiaries of Fairtrade. Fairtrade is not only unsuccessful in achieving its lofty aims, but in attempting to do so it encourages unfair practices. Without attacking the concept of more equitable trading relationships between developed and developing countries, this report decouples Fairtrade from the concept it is named for. We first look a bit at the background of Fairtrade before diving straight into the data where we will get a clear picture of the size and scope of Fairtrade in today’s global market. It will be shown that while still only a niche in global trade, Fairtrade is gaining ground, especially with consumers, and sector growth is impressive. We then expand upon the opaque pricing structure of Fairtrade products and the miniscule trickle of retail sale mark-ups back to the primary producers and see that after certification, administrative and other costs, marginalized farmers get an extremely raw deal. Fairtrade is then exposed as an unfair mechanism whose greatest impact is allowing retailers to take advantage of both producers and consumers. Even after we recognise the potential for Fairtrade to have a positive impact, in specific scenarios, ACORN International concludes that Fairtrade may not be just inefficient and unfair, but it may be harmful as well and distracts from higher-impact initiatives that could help marginalized producers and their families in the most fundamental and direct way: increasing the amount of cash in their pockets. 1: COMUCAP: A Peruvian Coffee & Aloe Social Enterprise
  3. 3. Un-Fairtrade Organization | 3 What is FairTrade According to the international organization Fairtrade: “The term ‘Fairtrade’ defines a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers- especially in developing countries”. 1 Not to be confused with ‘fair trade’ (a concept that promotes ethical trading partnerships), ‘Fairtrade’ is one of many ‘fair trade’ organizations that seek to empower the world’s marginalized producers by giving them market power and ensuring them a better price for their products. In this report, the term Fairtrade will refer specifically to this organization, rather than the concept. This distinction is very important. In 2008, Fairtrade products achieved $4.3 billion in global sales which grew by 15% to amount to just shy of $5 billion by the end of the following year. Today there are 827 Fairtrade certified producer organizations in 58 producing countries representing over 1.2 million farmers and workers. This report uses a figure of 746 rather than 827 certified producer organizations because 2008 is the most recent year for which we have full access to the data. This means that from 2008 to the present the number of certified organizations has increased by 11%. Overall, Fairtrade estimates that over 6 million people directly benefit from Fairtrade. 2 Fairtrade currently certifies sixteen products: coffee, bananas, cocoa, honey, cotton, flowers, fresh fruit, gold, juices, rice, spices and herbs, sports balls, sugar, tea, wine and composite products. 3 Certified products are marked with a logo to indicate their Fairtrade status. If the logos below are not familiar to you, they probably will be soon as the number of products sold as Fairtrade is constantly growing. There are currently nineteen Fairtrade Labelling Initiatives that cover twenty-three countries. They co-exist under the umbrella of the mother organization- Fairtrade International (FLO). 4 Fairtrade is different than other fair-trade organizations because it is a certification system rather than a direct trading partnership. Specific products obtain Fairtrade certification and certified producer organizations can sell their products both as Fairtrade as well as on the conventional market. Also, licensed retailers can sell Fairtrade products alongside non-Fairtrade products. A good example of this is the Swiss giant Nestlé which has been the target of much international protest due to their unsatisfactory operations in many developing countries. Despite being attacked for purchasing from producers who employ child-labor, Nestlé is still able to sell Kit-Kat bars as Fairtrade because they are 1 Fairtrade Glossary 2 Fairtrade 3 Fairtrade 4 Fairtrade NOTE: In this report, Fairtrade will be used to refer to FLO so as to refer to the entire organization
  4. 4. Un-Fairtrade Organization | 4 licensed to purchase Fairtrade cocoa. That the Fairtrade system allows for such ‘fair-washing’ by large firms trying to improve their public image is an important point that this report will consider. In order to become part of the Fairtrade club, a producer needs to obtain a certification from FLO. To do this the producer needs to meet FLO’s standards (all thirty-one pages of them), pay a $2000-$4000 certification fee and submit to annual inspections (which also cost money). Crucially, Fairtrade is meant to be a market of producer cooperatives. Membership in such an organization is supposedly necessary in order to join the Fairtrade club (though it will be seen that wage-labor organizations have also been let into the club in certain industries, resulting in some controversy). Membership of the Fairtrade club is meant to guarantee a producer minimum prices that are at least the market rate as well as social premiums that are paid on top of the price-floor. Revenue from the premiums is meant to be spent on improving the livelihoods of cooperative members. Fairtrade claims to encourage democracy by dealing with cooperatives since members are meant to collectively vote on the use of the premiums they receive. Club membership also entitles the producer the right to obtain 60% pre-financing from those purchasing their products as well as supposedly longer-term contracts in order to introduce more predictability and market power into the lives of the world’s marginal producers. Producers also have to pay Fairtrade in order to be part of the club. In order to sell Fairtrade products you need to obtain a license from FLO. This license is different from a certification. The certification a producer’s cooperative obtains shows that their products meet the standards of FLO. On the other hand, a retail license allows a firm access to the Fairtrade markets in exchange for agreement to follow Fairtrade principles as well as paying a fee. It is the revenues from these licenses that guarantee a revenue stream for Fairtrade. ACORN International has learned firsthand of the ups and downs of the relationships between FLO and producing cooperatives through our partnership with COMUCAP, a small women’s coffee and aloe vera producing cooperative of about 200 members located in Marcala, Honduras in the state of La Paz. In trying to expand their sales of beans we had excellent meetings with Rob Clarke, Executive Director of Fairtrade Canada ( and his staff about how to help increase COMUCAP’s sales and outreach in Canada. During the meeting he confirmed on their international database that COMUCAP was certified but there was an entry that indicated that they were in a temporary “suspended” status, possibly due to a payment issue. When one of the authors mentioned that COMUCAP grew aloe vera, Fairtrade Canada was especially excited about leading the way to help COMUCAP be perhaps the first certified, organic aloe vera producer, and almost immediately located a customer for the product in London, Ontario. Unfortunately, the first glow of excitement has long dimmed since FLO will not move forward on creating the aloe vera certification process until the other problem is resolved, and the regional office in Central America responsible for this area of Honduras will not resolve the suspension until they schedule a field visit, and now five months and counting, that visit has yet to be calendared, while these women are still stuck. Despite having been certified for more than a decade, COMUCAP and ACORN International are at wits end and despite the lobbying of our friends with Fairtrade Canada, have totally failed to speed up the process. Who is hurt here? Certainly the producers, and probably consumers who might benefit from a great new, natural product, but it underlines the problem of FLO and its lack of accountability and transparency, despite significant fees charged to 2: COMUCAP plantation and cabins
  5. 5. Un-Fairtrade Organization | 5 low income producers. One of the authors has visited with many of these women in their clean and dirt floored homes and met with them repeatedly, and these women should be first in line for a response from FLO, not somewhere between last and whenever. Background The concept of ‘fair-trade’ is not a new one. In 1946 a volunteer from the American Mennonite Central Committee took samples of needle-work from Puerto Rican women back to Pennsylvania, USA to sell to women in her community. By 1970 this had snowballed into a chain of boutiques called SelfHelp that grew so large by the mid-1990s that it was renamed Ten Thousand Villages and by 2008 there were over 130 shops across North America. 5 In the second session of the United Nations Conference on Trade and Development there was a call for ‘Trade, not Aid’ which further popularized the relationship between bettering the lives of those in the developing world and international trade flows. Handicrafts were fair-trade’s first products. In the 1980s food commodities were welcomed into the fair- trade community. However, it was not until 1988 that certification and labelling of fair-trade products was instituted by Max Havelaar of the Netherlands. Coffee was the first certified product and Mexico was the site of the first certified producer organization. Fairtrade, the organization, was founded in 1997, building on Max Havelaar’s work, bringing nineteen national fair trade certification initiatives under the umbrella of FLO. 6 Fairtrade (FLO) is the focus of this report. The Facts [All of the data used to create these tables is from Fairtrade itself and the reference, Fair Trade: A Human Journey, is a Fairtrade sponsored book released in 2010. The data presented is that of 2008 and any growth rates are from 2007-2008 unless otherwise stated.] Before discussing the issues facing the structure of Fairtrade as well as the arguments for and against the organization and its system, it is important to look at the cold, hard facts. We have presented these in the form of tables and subsequent analysis, highlighting both obvious issues and those issues that emerge from careful analysis of the figures. This report focuses on nine of the biggest Fairtrade certified products: coffee, cocoa, sugar, tea, flowers, rice, cotton, bananas and wine. PRODUCT CERTIFICATION DATES PRODUCT Certification Date Coffee 1988 Cocoa 1997 Sugar 1997 Tea 1996 Flowers 2004 Rice 2001 Cotton 2004 Bananas 1999 Wine 2003 5 Fair Trade: A Human Journey 6 Fair Trade: A Human Journey
  6. 6. Un-Fairtrade Organization | 6 FAIRTRADE IMPORTS IN RELATION TO GLOBAL PRODUCTIONS PRODUCT Global Production Global Imports of Fairtrade Coffee 7.8 million tonnes 65,808 tonnes Cocoa 4.2 million tonnes 10,299 tonnes Sugar 1.6 billion tonnesª 56,990 tonnesª Tea 3.9 million tonnes 11,467 tonnes In the sugar industry, global production measures the volume of sugar cane that is produced whereas global imports of Fairtrade measures the volume of sugar. Thus an apples-to-apples comparison is impossible º Global production of cotton reflects the volume of cotton produced whereas global imports of Fairtrade reflects the number of items that contain Fairtrade cotton in them. Thus an apples-to-apples comparison is impossible. Fair Trade Retail Sales in Relation to Conventional Global Trade PRODUCT Global Trade Fairtrade Retail Sales Fairtrade % of Trade Coffee $11.1 billion $1.8 billion 16% Cocoa $8.4 billion $275.3 million 3.30% Sugar $20.1 billion $257.4 million 1.30% Tea $3.75 billion $294.6 million 7.90% Flowers $3.7 billion $256 million 6.90% Rice $10.5 billion $28 million 0.26%
  7. 7. Un-Fairtrade Organization | 7 Individual Products’ Retail Sales as a Percentage of the Fairtrade Total These three tables reveal a number of important things about Fairtrade. Perhaps one of the most striking conclusions that can be drawn from the import data is the miniscule volume of Fairtrade production compared to global production. Accounting for 46.2% of Fairtrade’s total retail sales, coffee is Fairtrade’s most profitable product. However, imports of Fairtrade coffee only represent 0.84% of global production. Those of the second most profitable product, bananas, are just under half of that figure at 0.35% of global production. Retail sales of Fairtrade rice are a mere 0.26% of global trade and imports of rice are an almost non-existent 0.0007% of global production. It is clear: Fairtrade is still a niche market. What is interesting in looking at these three tables is that while the share of global production that Fairtrade imports is tiny, the retail sales of Fairtrade imports are a much larger percentage of global trade. Coffee’s 0.84% of global production becomes 16% of global trade when you compare in monetary terms rather than in weight. There are two reasons why Fairtrade products earn a greater share of global trade through their retail sales than their import’s share of global production would suggest. The first is that Fairtrade products, by their nature, carry a much higher price than non-Fairtrade products. This is because license fees raise the marginal costs for retailers as do premiums and price-floors. To be fair to Fairtrade, these figures reflect that products are being sold at higher prices on the Fairtrade markets and thus Fairtrade’s structure does accomplish one of its main missions. However, the impact of these higher prices and the relationship between price-floors and retail prices will be seen not to be as directly linked as many assume. Retailers take advantage of consumers’ willingness to pay more for Fairtrade in the belief that they are helping third world farmers. This is an issue that we will expand upon later. The second reason is that not all produced goods are traded across borders. Rice is an extreme example of this. Only 7% of all rice produced, cross international borders. This is because rice is usually used to feed the people of the country in which it is produced. While not as extreme as rice, other Fairtrade certified products also fall into the categories of goods that do not necessarily cross borders. However, even with this in mind, Fairtrade still represents a very small share of goods that do actually get traded. Even with higher retail prices, Fairtrade retail sales across these nine products still accounts for only 4% of global trade. We have compared Fairtrade imported volume to global production rather than global trade volume because we lack the figures to do the latter comparison. However, with rice we know that 7% of global production crosses international borders making global trade 45.6 million tons. Of this, 0.001% is imported as Fairtrade. Therefore the conclusion that Fairtrade imports represent a very small share of global trade, based on their relationship to global production, remains valid. PRODUCT % of Total Retail ($3.9 billion) Coffee 46.20% Cocoa 7.06% Sugar 6.60% Tea 7.60% Flowers 6.60% Rice 0.70% Cotton 6.70% Bananas 16.90% Wine 1.80%
  8. 8. Un-Fairtrade Organization | 8 A large part of the economic argument against Fairtrade is that price-floors create soft budget constraints for producers and create perverse incentives to produce beyond the point of market equilibrium. In basic supply and demand theory, when production increases, prices fall (as there is more supplied than demanded). The decrease in price is meant to be a signal from the market to the producers to produce less. However, with the institution of a price-floor this signal never gets through and Fairtrade farmers continue to produce because they are guaranteed a minimum price. This is good for the small percentage of the world’s marginalized farmers that are allowed into the Fairtrade club, but for those who either are landless, illiterate or unable to join a cooperative for one reason or another, over production by Fairtrade farmers means that prices tumble for everyone else. It is because of this negative knock-on effect on poor farmers that Peter Griffiths argues that Fairtrade causes death and destitution. 7 Recently, a New York Times article referenced a study that has linked poverty to death in the United States (in the same manner that cigarettes have been linked to death). 8 If such a link can be found in the world’s largest economy, then it is certain to also apply to developing countries. Given such findings, Griffiths’ claim of Fairtrade causing death and destitution by consigning non-Fairtrade farmers to poverty in the wake of incentivised overproduction may not be as radical as it first sounds. There have been refutations of this economic argument on the grounds that since Fairtrade is such a small share of global trade, Fairtrade farmers are incapable of flooding the markets and thus are not capable of having a huge impact on global prices. This is a very valid argument. However, Fairtrade is growing bigger and bigger all the time. Not only do its products experience high growth rates (see table below), but consumers have begun to ‘vote with their feet’ and demand Fairtrade goods. 9 In 2009 Starbucks committed to doubling its purchase of Fairtrade coffee. Though this still only represents 10% of Starbucks total imports, it represents almost a third of the world’s imports of Fairtrade coffee. 10 Whole Foods has also started offering a Fairtrade brand and university campuses are becoming Fairtrade campuses (including the university of one of this report’s authors, the University of Edinburgh). These examples are important because each of them represent a case where Fairtrade has been demanded by consumers. Whole Foods originally rejected the idea of a Fairtrade product because they were not satisfied with Fairtrade’s operational structure. 11 Starbucks also prefers its own Coffee and Farmer Equity Practices (CAFE Program) to the Fairtrade model. Without involving price-floors, premiums, 7 Griffiths, Peter, ‘Ethical Objections to Fairtrade’ 8 New York Times ‘Researchers Link Deaths to Social Ills’ 9 The Economist ‘Voting With Your Trolley’ 10 Fairtrade: A Human Journey 11 Haight, Colleen ‘The Problem with Fairtrade Coffee’ 3: Fair Grinds Coffee in New Orleans
  9. 9. Un-Fairtrade Organization | 9 certification or licensing fees, CAFE seeks to promote traceability of the product through detailed production and practice descriptions. 12 Massive trans-national corporations are also turning to Fairtrade, including Cadbury whose launch of the Fairtrade dairy milk chocolate bar was set to double the amount of Fairtrade chocolate bars purchased in Canada. 13 Even Nestlé, the Swiss giant that is constantly under attack for the way it does business, has been able to sell some Fairtrade certified products. This has led to accusations of ‘fair-washing’ pointed at large retailers who are attempting to improve their public image by jumping on the Fairtrade band-wagon. The main message is that while Fairtrade may be very small now, with such high sector growth rates and increasing pressure from consumers for Fairtrade products, it has great potential to grow into something much larger. The argument for Fairtrade that dismisses the prospect of the negative ramifications of overproduction has weight only when Fairtrade is small. The more Fairtrade grows the more likely it becomes that the overproduction scenario will occur and the fact is, it is growing, and it is growing fast. Fairtrade Product Growth Rates PRODUCT 2007-2008 Growth Rate Coffee 14% Cocoa no info Sugar no info Tea 112% Flowers 31% Rice 11% Cotton 94% Bananas 28% Wine 57% We now turn to look at the nature of the organizations that obtain Fairtrade certification. Number of Certified Fairtrade Organizations per Product PRODUCT Number of CFTOs % of Total (746) Coffee 291 39% Cocoa 30 4% Sugar 15 2% Tea° 74 9.90% 12 Reynolds, Laura, ‘Mainstreaming Fairtrade Coffee: From Partnership to Traceability’ in World Development 13 Fairtrade: A Human Journey
  10. 10. Un-Fairtrade Organization | 10 Flowers° 46 6% Rice 15 2% Cotton 28 3.80% Bananas° 63 8.40% Wine° 27 3.60% °These products have certified small producers’ associations as well as certified salaried workers’ organizations (i.e. with wage labourers). Small Producers’ Associations versus Salaried Workers Organizations PRODUCT Small Producers' Associations Salaried Workers Organizations (SWO) % SWO Tea 31 43 58.80% Flowers 0 46 100% Bananas 28 35 55.60% Wine 4 23 85.10% %OF TOTAL Over all 9 Products: 79% 19.80% The two tables above give an overview of how many certified organizations make up the Fairtrade movement. In total, Fairtrade had 746 certified organizations in 2009. Of these 746, small producers’ associations accounted for 541 and salaried workers’ organizations for 205. As can be predicted from the figures in the first set of tables, the bulk of the certified organizations produce coffee (291 organizations making up 39% of the total). It is interesting to note that the two products with the next largest numbers of certified organizations allow certification of salaried workers organizations. In fact, not only do they allow labour-based organizations, but the majority of certified organizations in tea and bananas are wage labour-based (55-60% each). In the flowers sector, 100% of certified organizations use hired labour. So even though small producers’ associations are just under 80% over all nine products, of the largest products (in volume of imports as well as amount of retail sales), many are using hired labor. Certifying organizations employing hired labor has always been a very contentious issue, both outside the Fairtrade community and within. When tea plantations started to obtain Fairtrade certifications for their products in 1996 there was a great outcry, especially from the coffee sector. Fairtrade is based on the idea of empowering farmers and allowing them to wield more market power in trade negotiations by grouping them into cooperatives of small farmers who do not employ full time labor. Fairtrade is membership fee charging club. To join you pay a membership in the form of a 4COMUCAP coffee processing
  11. 11. Un-Fairtrade Organization | 11 certification fee (paid by the cooperative and normally in the range of $2,000-$4,000 (USD) annually). If you are a small farmer and want to sell organic goods (and there is a very strong correlation between consumer demand for Fairtrade and demand for organic goods), you have to pay yet another certification fee (however, that is paid to a different organization). Because of this and due to the necessity of record keeping and the time required to work with Fairtrade and cooperative bureaucracies, Fairtrade is simply inaccessible to many marginalized farmers who could really benefit from the safety net of a price-floor and the promise of higher prices. For an example of such bureaucracy and complication one only need look as far as the standards a Fairtrade certified organization needs to meet; they are thirty-one pages long! So when Fairtrade started to certify organizations that used hired labor, jealousy was rife. Fairtrade requires organizations to allow workers to organize, create a framework for collective bargaining and spend premiums on improving the living conditions of their workers. However, it was found that in some tea plantations, workers do not see anything of the premium for years and when they finally do, it is not in a direct cash transfer, but rather in the form of a laundry basket or a thermos. 14 Inspections of Fairtrade certified organizations are carried out annually, but are announced ahead of time and there is much proof of plantation owners sprucing up living areas and coaching workers on what to say ahead of time in order to cover up poor working conditions. 15 In Nilgiri Hills, India it was found that tea estate workers were unaware that a premium was being paid for their tea on top of the purchase price. They laughed when they heard that consumers in developed countries were paying more for the tea they produced thinking it was improving the living conditions of marginalized farmers. 16 Fairtrade claims that its labor-based certified organizations pay at least the minimum living wage, but there has been much proof that this has not been the case. 17 The problem is, there is no way for Fairtrade to monitor what these organizations are paying their workers (it would be absolutely impossible to do) and their annual inspections are neutralized by the fact that they are pre-announced and therefore involve elaborate preparations. When Fairtrade touts its support of cooperatives, it is unfair to consumers who purchase Fairtrade thinking they are helping democratically organized marginalized farmers, when too often that is simply not the case. This point opens up the debate over where the extra money paid by consumers actually goes. We will go into more detail a bit later on. United Kingdom’s Role in Fairtrade 14 Tom Heinemann’s documentary ‘Bitter Taste of Tea’ as referenced in The Times 15 The Times ‘Case Study: Kenya: Workers Deprived of Dignity’ 16 The Times ‘Case Study: India: ‘Nothing is Done to Help Us’ 17 Financial Times ‘The Bitter Taste of Fairtrade Coffee’ and ‘Fair Workers Paid Below Minimum Wage’
  12. 12. Un-Fairtrade Organization | 12 United Kingdom PRODUCT Fairtrade Imports % Total Fairtrade Imports Coffee 9,642 tonnes 14.70% Cocoa 3,612 tonnes 35% Sugar 43, 832 tonnes 77% Tea 9,330 tonnes 81.40% Flowers 105.4 million stems 33.90% Cotton 20.2 million items 73% Bananas 189, 413 tonnes 63% Wine 4.4 million tonnes 49% United Kingdom’s Growth Rate as Compared to Overall Growth Rates in Fairtrade Products United Kingdom Overall PRODUCT 2007-2008 Growth Rate Coffee 16% 14% Cocoa no info no info Sugar no info no info Tea 149% 112% Flowers 26% 31% Rice 33% 11% Cotton 112% 94% Bananas 32% 28% Wine 25% 57% We have chosen to look closely at the United Kingdom’s relationship with Fairtrade because it represents 30% of Fairtrade’s global sales. 18 Of the nine products referenced in this report, the United Kingdom imports a majority of Fairtrade imports of four of them, just under half of one of them, an insignificant amount (relative to other Fairtrade importing countries) of one of them (rice) and around a third of another two. The product for which the United Kingdom plays the least significance, besides rice, is in coffee. The United Kingdom’s 81.4% share of Fairtrade tea imports helps explain this. Put simply, British consumers prefer tea to coffee. There can be no doubt that the United Kingdom is a very large player in the Fairtrade market. 18 Fairtrade: A Human Journey
  13. 13. Un-Fairtrade Organization | 13 This already significant role is on a path to expansion. Growth rates for importation of Fairtrade to the United Kingdom top those for the overall global growth rate in five of the seven products for which we have data. Thus, today the United Kingdom probably accounts for more than the 30% figure discussed above. With this in mind, we now turn to the relationship that ACORN International Partner countries have with the Fairtrade market. As it will be seen below, not only do ACORN International affiliates house a significant amount of Fairtrade certified organizations within their borders as producers, but Canada and the United States are also important players as importers. With interests on both sides of the production and consumption relationship, Fairtrade is something that has the reach to affect all of our members. ACORN PARTNER COUNTRIES AND FAIRTRADE The first two countries that we will look at are the United States and Canada because they represent the consumers in the trading relationship. UNITED STATES PRODUCT Fairtrade Imports % Total Fairtrade Imports Coffee 24,101 tonnes 36.70% Cocoa 1,745 tonnes 17% Sugar 3,364 tonnes 6% Tea 600 tonnes 5.20% Bananas 11, 292 tonnes 3.70% United States Overall PRODUCT 2007-2008 Growth Rate Coffee 7% 14% Tea 33% 112% Bananas 244% 28% CANADA
  14. 14. Un-Fairtrade Organization | 14 PRODUCT Fairtrade Imports % Global Production % Total Fairtrade Imports Coffee 5,029 tonnes 0.06% 7.60% Tea 271 tonnes 0.007% 2.40% Canada Overall PRODUCT 2007-2008 Growth Rate Coffee 49% 14% Tea 251% 112% Compared to the United Kingdom’s 30% share of global Fairtrade sales the United States is not far behind with 25.6%. 19 Undoubtedly the United State’s greatest contribution to the Fairtrade market is in coffee (importing around 37% of all Fairtrade coffee worldwide). This figure is surely higher today as these figures are from 2008 and Starbucks signed their big deal with Fairtrade in 2009. While the United States’ growth rates are much lower than British and overall rates, they are still significant and consumer demand for Fairtrade products continues to rise as retailers are put under more and more pressure to sell Fairtrade brands. Canada is a much smaller player than the United Kingdom or the United States, but it still accounts for 4.5% of global Fairtrade sales. 20 Despite being newer to the game, Canada made a strong showing in 2007-2008 experiencing a 67% growth rate in the purchase of Fairtrade goods thus putting total Fairtrade sales just shy of $200 million. 21 With the Cadbury-Fairtrade deal mentioned earlier in the report, Canadian sales of Fairtrade chocolate bars were set to double and the 251% growth rate in tea well exceeded the 112% sector rate. With statistics like these it is clear that Canada is a country to watch as its relationship with Fairtrade is certainly set to grow. INDIA PRODUCT Number FTCOº Total FTCOs Global % Product Total FTCOs Tea 18 74 25% Rice 4 15 27% Cotton 14 28 50% ºFTCO meaning Fairtrade Certified Organization MEXICO 19 Fairtrade: A Human Journey 20 Fairtrade: A Human Journey 21 Fairtrade: A Human Journey
  15. 15. Un-Fairtrade Organization | 15 PRODUCT Number FTCO Total FTCOs Global % Product Total FTCOs Coffee 47 291 16% KENYA PRODUCT Number FTCO Total FTCOs Global % Product Total FTCOs Tea 17 74 23% Flowers 20 46 43% DOMINICAN REPUBLIC PRODUCT Number FTCO Total FTCOs Global % Product Total FTCOs Cocoa 4 30 13% Bananas 22 63 36% ARGENTINA PRODUCT Number FTCO Total FTCOs Global % Product Total FTCOs Wine 8 27 30% PERU PRODUCT Number FTCO Total FTCOs Global % Product Total FTCOs Coffee 41 291 14% The above six tables showcase the other side of the trading relationship: that of the producers. As can be seen, ACORN International affiliate countries play a significant role in the Fairtrade system. Half of the certified Fairtrade organizations that produce cotton are located in India and just shy of half of flower growing certified organizations are in Kenya. In eight of the nine products this report discusses, production occurs within at least one of ACORN International’s affiliates. With members on both ends of the trading relationship it is clear that ACORN International has an interest in the workings of Fairtrade. Whether it is unfair to the producer, consumer or both (as we believe it may be), our members are being affected.
  16. 16. Un-Fairtrade Organization | 16 ISSUES It is at this point in the report that we will expand upon some of the issues that have been brought up in our interpretation of the data. OPAQUE BENEFITS The first issue that we will discuss relates to the extra price paid by the consumer to the retailer. Market research has shown that the average consumer is willing to spend 20-40cents extra for a cup of coffee if it is ‘helping the third world’. 22 There are also studies showing that an increase in the cost of a cup of conventional coffee decreased the amount bought by consumers, but there was little to no effect of a similar increase on Fairtrade coffee. In the United Kingdom, a major coffee retailer, Costa, admitted that of the extra 10p (16cents US) that they charged on Fairtrade coffee, they pocketed 99% of it. Peter Griffiths goes on to explain that those 16cents would have had 100 times the impact if they had been directly donated to a high impact charity (which Fairtrade is not). 23 Because the consumer believes that the extra money they are paying is going towards a charitable purpose, a substitution effect may occur and thus they will be less willing to spend money on other charity projects, thinking they already did their part. One definition of unfair is that ‘those pushing for a policy are giving false or misleading information to the people they are trying to persuade to follow it’. It is by this definition that David Henderson argues Fairtrade is unfair and considering the previous paragraph it is easy to see where his argument has strength. 24 People who pay higher prices are trying to do well by the producers in developing countries, but they often do not realise that the extra money they are paying for a Fairtrade product has no relationship whatsoever with the money that actually gets back to the producer. On Fairtrade’s website they even admit that they have no say in what a retailer charges for its certified products. 25 This is one of Peter Griffiths’ greatest issues with Fairtrade: it is impossible to know how much of the extra paid by the consumer actually gets back to the producer. Unlike ethical trading schemes that put stickers on products telling you exactly how much of your money goes back to the producer, the consumer who purchases Fairtrade is left very much in the dark. It is because of this that retailers like Costa can get away with pocketing 99% of the extra that they charge. In addition, even if you could figure out how much money got back to the cooperatives, it becomes even more difficult to figure out exactly how much benefit individual farmers get from the premiums received. Giving money to cooperatives is supposed to support democracy and collective well-being. Cooperative members are meant to vote on how to use the premiums. Schools, roads and better farming equipment have been cited as examples of uses of premiums that improve the living conditions of cooperative members and their families. However, as was seen with the tea and flower producing organizations with hired labor, most marginalized laborers have no knowledge of this premium and some even laughed at the notion that it existed (see above). 22 Peter Griffiths speaking at the UK Coffee Leaders Summit 23 Griffiths, Peter, ‘Ethical Objections to Fairtrade’ 24 Henderson, David ‘Fairtrade is Counterproductive and Unfair’ in Economics Affairs 25
  17. 17. Un-Fairtrade Organization | 17 In 2010, over $10.8 million in coffee premiums were delivered to producers (and as an interesting tie to ACORN International, 23% of them went to Peru). 26 While this sounds like a very healthy amount, for stronger cooperatives it has been seen that 50% of received premiums go towards the administrative costs necessary for making sure that their product continues to meet the ‘tick boxes’ of Fairtrade certification. Weaker cooperatives who only manage to sell 10-20% of their product as Fairtrade spend all of the premiums they receive on keeping up with Fairtrade standards. 27 Consumers trust that the extra money they spend goes towards helping the third world; it is obvious that this is not happening. At the end of the Charter of Fairtrade Principles Fairtrade says: “The Fairtrade movement is conscious of the trust placed in it by the public and is committed to developing and promoting the highest standards of integrity, transparency and accountability in order to maintain and protect that trust”. 28 Unfortunately, at present, Fairtrade has an awfully long way to go to achieve these high standards of integrity, transparency and accountability and yet the public continually instils them with large amounts of trust. It is characteristics like these that justify Henderson’s judgement of Fairtrade being unfair. Recently we have also come to better understand some of the pressures of selling fair trade coffee and other products through our partnership with Fair Grinds Coffeehouse ( in New Orleans, the oldest 100% fair trade house in the city for over 10 years. Perhaps it is needless to say, but in a competitive environment with Starbucks and local chains, the coffee, whether fair trade or not, has to be priced competitively at Fair Grinds, regardless of the premium paid, as we have discussed, for the producer, or the mark-up by the broker and roaster to supply such coffee. In fact we might even argue that a fair-trade only purveyor, like Fair Grinds, might even be at a competitive disadvantage compared to other coffee operations able to source more cheaply and set the prevailing rate for a cup of coffee, which many customers already believe is too pricey. The confusion in the marketplace on the various claims of fair-trade and the increasingly crowded field of certification and certifiers between Fairtrade (FLO), Rainforest Action Network, and others also means that an operation trying to play fair with its customers, like Fair Grinds, is unable to successfully communicate an argument for a price differential when its own customers “don’t know beans.” Fair Grinds Coffeehouse has created a direct relationship to support ACORN International organizing in Peru, Mexico, and Honduras where they are able to source the beans at the Port of New Orleans in order to make sure that poor people in these countries actually benefit, and is negotiating to begin buying directly from COMUCAP in Honduras and other suppliers to take the brokers out of the bargain in order to survive, but the premium is not something that can be passed on to the consumer in this economy, which threatens the entire Fairtrade (FLO) certification business model as well. 26 TransFair USA Almanac 2010 27 Peter Griffiths speaking at the UK Coffee Leaders Summit 28 Charter of Fairtrade Principles
  18. 18. Un-Fairtrade Organization | 18 UNFAIR FINANCES One of the benefits of being part of the Fairtrade club is supposedly better access to financing. Retailers and wholesalers who purchase from cooperatives are meant to be able to pre-finance 60% of the contract price on request. 29 Contracts are also supposed to be long-term. This is meant to address the problem of the volatile nature of producers’ incomes over the year. This problem is caused by the nature of working in agriculture: you make all of your money right after you harvest and nothing much in between. Access to credit allows farmers to ease their budgetary constraints and smooth their consumption. It also gives them confidence to invest in their business since with a longer-term contract they have less fear of incurring sunk costs from which they will never recover. Reducing volatility and unpredictability is a hallmark of Fairtrade’s self-acclaimed raison d’être. Sadly, in reality this is not the way it works. Joni Valkila points out that while other exporting organizations will often pre-finance at an interest rate of 11%, Fairtrade financing usually comes at a price of 18-22%. 30 One could attempt to dispel this argument by saying that Fairtrade financing is guaranteed in a manner that producers can trust, but that still does not take away from the fact that 18-22% is a very steep price to pay, especially for developing world farmers. Laura Reynolds argues that ‘market-driven’ firms attempting to ‘fair-wash’ (to look better in the consumers’ eyes who are increasingly demanding Fairtrade products) often argue that they are in the business of buying commodities, not financing. She goes on to point out that these ‘market-driven’ firms are often the biggest purchasers of Fairtrade (we have seen that Starbucks accounts for one third of Fairtrade coffee sales) and thus producing cooperatives are afraid that if they do not play by the firm’s rules, they will be unable to sell their products for prices that justify the fee they pay for Fairtrade certification. 31 This fear of failing to sell their products at the Fairtrade price is very real. Fedecocaua, the largest Fairtrade certified organization in Guatemala, reported that it could only sell 23% of its product to Fairtrade buyers. Similarly, Coocafe, the top level Fairtrade certified organization in Costa Rica, reported that they could only sell 20% of theirs and they specifically cited the reason to be a lack of buyers. 32 In 1998 it was reported that certified coffee cooperatives were selling 10% of their product as Fairtrade on average. Today this number has risen to 50% according to Fairtrade, but anecdotes such as those from Fedecocaua and Coocafe cannot be disregarded. 33 In order to sell any of your product as Fairtrade you need to pay to be certified and pay costs to undergo annual inspections. 34 It is easy to see why Fairtrade may not be worth it for the producer when they are paying steep prices to sell such a small percentage of their product at the Fairtrade price. It is also clearer now why so much of the premiums that are received by cooperatives go towards meeting Fairtrade standards and certification costs. It is for this reason that some cooperatives have actually left the Fairtrade family. 29 Reynolds, Laura, ‘Mainstreaming Fairtrade Coffee: From Partnership to Traceability’ in World Development 30 Valkila, Joni, ‘Fairtrade Organic Coffee Production in Nicaragua: Sustainable Development or Poverty Trap?’ in Ecological Economics 31 Reynolds, Laura, ‘Mainstreaming Fairtrade Coffee: From Partnership to Traceability’ in World Development 32 Berndt, Colleen, ‘Does Fairtrade Coffee Help the Poor?’ 33 Fairtrade: A Human Journey 34 Henderson, David ‘Fairtrade is Counterproductive and Unfair’ in Economics Affairs
  19. 19. Un-Fairtrade Organization | 19 UNFAIR PRICES The main draw of the Fairtrade system is the price-floor. By guaranteeing a minimum price for a product, producers are meant to be able to protect themselves from volatile prices determined by the market. As the commodity market price of the product increases, so does the Fairtrade price-floor and the premium guarantees that Fairtrade products should always fetch a price above the market. However, in reality, what is meant to be a price-floor often becomes a price-ceiling. Market-driven firms who are seeking to placate consumers by offering Fairtrade brands will often refuse to pay any more than the price-floor. Retailers already have to pay more for the product because they have to pay the Fairtrade Organization itself in order to obtain a license to sell Fairtrade goods. It is this license that makes up the bulk of Fairtrade’s income at 70% in the United States and 85% in the United Kingdom (with the rest of the income in the form of donations or subsidies from DFID and USAID among others). 35 It is important to note that these license fees do not make it back to the producers and in the United Kingdom 70% of the revenue from the fees is used to advertise the Fairtrade brand within the country. 36 It is because of the profit maximizing drive and sheer size of the trans-national firms that they have the incentive to both purchase the product at the lowest price possible (so as to make up for paying a license fee) and bully producers into following their rules (as we saw above in regards to financing). This flaw that exists at the very heart of the Fairtrade system is a very serious one indeed. PERVERSE INCENTIVES This price-floor-as-ceiling phenomenon is especially detrimental in the coffee market. This is because there are essentially two coffee markets: the normal one and the specialty one. Coffee prices are set on the normal market based on the quality of the bean and standards are extremely strict. However, the specialty coffee market represents an extremely wide variety of coffees thus comparison is often impossible. Fairtrade coffee is considered a speciality coffee and is thus sold on the specialty coffee market. Since the Fairtrade price-floor is based on the market value of coffee, situations arise where it is actually more profitable for a producer to not sell their product under the Fairtrade name. As we have seen, producers cannot sell all their products as Fairtrade even if they wanted to. Thus a perverse incentive is created: producers are better off selling their lower grade coffee as Fairtrade and their higher grade coffee not as Fairtrade as they will fetch a better price for it on the non-specialty market. The result of these perverse incentives is that Fairtrade consumers receive lower quality coffee. This is yet another way Fairtrade is unfair to both producers and consumers. 35 Griffiths, Peter, ‘Ethical Objections to Fairtrade’ and Haight, Colleen ‘The Problem with Fairtrade Coffee’ 36 Griffiths, Peter, ‘Ethical Objections to Fairtrade’
  20. 20. Un-Fairtrade Organization | 20 POTENTIAL FOR POSITIVE? We have looked over many of the issues that infect the Fairtrade system. However, we must also acknowledge the positive. While the price-floor has its flaws, especially within the coffee sector, and the money that gets back to the farmers is not as significant as Fairtrade would like us to believe, it has played a positive role in the past. During the coffee crisis at the beginning of the 21 st century, prices paid to coffee producers dropped to a 100-year low. Murray, Raynolds and Taylor found that the price-floor of Fairtrade coffee played a significant role in helping small producers weather the economic storm. 37 Bradley Wilson also found that in 1998 in Nicaragua after Hurricane Mitch struck, price-floors were of massive help. However, he also says that Fairtrade should “offer more than a means of basic survival” and that while it is an effective safety net, Fairtrade is not the magic bullet its promoters would like to advertise it is. 38 What we can take from this is that guaranteed higher income is beneficial for producers in developing countries as it greatly reduces the amount of risk and volatility in their economic lives. However, it is important to remember that a Fairtrade price-floor is not the only way to boost income and there are many more lower-cost, higher-impact projects out there that are much more effective. At the end of the day, what these producers need is simple: increased income. Peter Griffiths says that he is only concerned with “cash in the pocket” and it is clear that while Fairtrade can help out in times of great need, it does not provide this necessity on a day-to-day basis. 39 CONCLUSION This report began with an explanation of Fairtrade’s lofty claims of creating a better deal for the developing world’s marginalized producers. It now ends having challenged that claim and it can only be concluded that reality shows that Fairtrade does not live up to it. More importantly, it has been shown that it is not just an issue of lax oversight and management on behalf of Fairtrade, but more crucially it is an issue seated at the very core of Fairtrade’s operational structure. Rather than helping the marginalized producer, Fairtrade’s greatest impact has been to allow trans-national firms to take advantage of both consumers and producers. Paradoxically, the best way to describe Fairtrade is to use the word ‘unfair’. Unfair to producers and consumers alike, Fairtrade fails to achieve its aims and negatively affects many on its way to failure. To empower the developing world’s producers and create better trade relationships is an admirable goal, but confronted with the evidence, it is clear that Fairtrade is not the way to reach such a goal. There is no substitute for cash in the pocket as the most effective form of direct money transfer that improves the lives of lower income families. Fair-trade initiatives that are transparent in telling exactly how much money goes back to the producer and that do not require a certification organization as a middle-man are much more effective than Fairtrade. Every penny spent on Fairtrade is a penny that could have had much higher impact if spent elsewhere. Producers and consumers around the world deserve better than Fairtrade. It is time we started to set about remedying the situation. Authors’ Note: On September 15 th , 2011 Fair Trade USA announced their decision to split from the international organization Fairtrade. Chief executive Paul Rice justified the move claiming the organization was “after results” (a very market-oriented 37 Murray, Raynolds and Taylor, ‘One Cup at a Time: Poverty Alleviation and Fairtrade in Latin America’ 3838 Wilson, Bradley ‘Indebted to Fairtrade? Coffee and Crisis in Nicaragua’ in Geoforum 39 Peter Griffiths speaking at the UK Coffee Leaders Summit
  21. 21. Un-Fairtrade Organization | 21 response from the head of an organization whose founding principle was to create an alternative to market-capitalism). i This move has caused uproar within the Fairtrade community as light is increasingly being shed on the unfair nature of an ethical trading system that supposedly exploits the developed world’s markets to the benefit of developing world producers. This article, written in July-August 2011, exposes the pitfalls and corresponding concerns pertaining to the international Fairtrade system. Fair Trade USA’s move in September only serves to justify existing anxieties and adds further weight to the argument that Fairtrade is, in reality, anything but fair, especially since the Fair Trade USA action is seeking to dilute, what we have show in the foregoing is already a woefully inadequate system for producers and consumers. The authors of this report are Melanie Craxton (University of Edinburgh) and Wade Rathke, Chief Organizer, ACORN International. i Business Week, ‘An American Rebel Roils Ethical Commerce’ (November 7 th -13 th , 2011).