ACORN International Fairtrade Report

Un-Fairtrade Organization How Fairtade Fails the Global Poor Melanie Craxton & Wade Rathke ACORN International — New Orleans, LouisianaP: 504-302-1238 x2002 E: chieforganizer@acorninternational.org

Un-Fairtrade Organization | 2Introduction At first glance, Fairtrade (the organization, not the concept) looks like a great way to empower marginalizedproducers and workers. With guaranteed prices, financing and social premiums to play for, it is easy to see why, on thesurface, Fairtrade is an attractive club to join. However, this report digs deep into the ins-and-outs of Fairtrade to find thatthe organization is seriously failing to live up to its potential. In fact, it will be found that at its core, the structure ofFairtrade itself is extremely flawed. Fairtrade is meant to answer the call for greater equity in trading relationships by thedeveloped 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, thisreport 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 clearpicture of the size and scope of Fairtrade in today’s global market. It will be shown that while still only a niche in globaltrade, Fairtrade is gaining ground, especially with consumers, and sector growth is impressive. We then expand upon theopaque pricing structure of Fairtrade products and the miniscule trickle of retail sale mark-ups back to the primaryproducers 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 bothproducers and consumers. Even after we recognise the potential for Fairtrade to have a positive impact, in specificscenarios, ACORN International concludes that Fairtrade may not be just inefficient and unfair, but it may be harmful aswell and distracts from higher-impact initiatives that could help marginalized producers and their families in the mostfundamental and direct way: increasing the amount of cash in their pockets. 1: COMUCAP: A Peruvian Coffee & Aloe Social Enterprise

Un-Fairtrade Organization | 3What is FairTradeAccording to the international organization Fairtrade:“The term ‘Fairtrade’ defines a trading partnership, based on dialogue, transparency and respect, that seeks greater equityin international trade. It contributes to sustainable development by offering better trading conditions to, and securing the 1 rights of, marginalized producers and workers- especially in developing countries”. Not to be confused with ‘fair trade’ (a concept that promotes ethical trading partnerships), ‘Fairtrade’ is one ofmany ‘fair trade’ organizations that seek to empower the world’s marginalized producers by giving them market powerand ensuring them a better price for their products. In this report, the term Fairtrade will refer specifically to thisorganization, 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 $5billion by the end of the following year. Today there are 827 Fairtrade certified producer organizations in 58 producingcountries representing over 1.2 million farmers and workers. This report uses a figure of 746 rather than 827 certifiedproducer organizations because 2008 is the most recent year for which we have full access to the data. This means thatfrom 2008 to the present the number of certified organizations has increased by 11%. Overall, Fairtrade estimates that 2over 6 million people directly benefit from Fairtrade. Fairtrade currently certifies sixteen products: coffee, bananas, cocoa, honey, cotton, flowers, fresh fruit, gold, 3juices, rice, spices and herbs, sports balls, sugar, tea, wine and composite products. Certified products are marked with alogo to indicate their Fairtrade status. If the logos below are not familiar to you, they probably will be soon as the numberof products sold as Fairtrade is constantly growing. There are currently nineteen Fairtrade Labelling Initiatives that cover twenty-three countries. They co-exist under 4the umbrella of the mother organization- Fairtrade International (FLO). Fairtrade is different than other fair-trade organizations because it is a certification system rather than a directtrading partnership. Specific products obtain Fairtrade certification and certified producer organizations can sell theirproducts both as Fairtrade as well as on the conventional market. Also, licensed retailers can sell Fairtrade productsalongside non-Fairtrade products. A good example of this is the Swiss giant Nestlé which has been the target of muchinternational protest due to their unsatisfactory operations in many developing countries. Despite being attacked forpurchasing from producers who employ child-labor, Nestlé is still able to sell Kit-Kat bars as Fairtrade because they are1 Fairtrade Glossaryhttp://www.fairtrade.net/fileadmin/user_upload/content/2009/about_fairtrade/Fair_Trade_Glossary.pdf2 Fairtrade http://www.fairtrade.net/faqs.0.html?&no_cache=13 Fairtrade http://www.fairtrade.net/?id=361&L=04 Fairtrade http://www.fairtrade.net/?id=361&L=0. NOTE: In this report, Fairtrade will be used to refer to FLO so as to referto the entire organization

Un-Fairtrade Organization | 4licensed to purchase Fairtrade cocoa. That theFairtrade system allows for such ‘fair-washing’ bylarge firms trying to improve their public image is animportant point that this report will consider. In order to become part of the Fairtradeclub, a producer needs to obtain a certification fromFLO. To do this the producer needs to meet FLO’sstandards (all thirty-one pages of them), pay a$2000-$4000 certification fee and submit to annualinspections (which also cost money). Crucially,Fairtrade is meant to be a market of producercooperatives. Membership in such an organization issupposedly necessary in order to join the Fairtradeclub (though it will be seen that wage-labor 2: COMUCAP plantation and cabinsorganizations have also been let into the club incertain industries, resulting in some controversy). Membership of the Fairtrade club is meant to guarantee a producerminimum prices that are at least the market rate as well as social premiums that are paid on top of the price-floor. Revenuefrom the premiums is meant to be spent on improving the livelihoods of cooperative members. Fairtrade claims toencourage democracy by dealing with cooperatives since members are meant to collectively vote on the use of thepremiums they receive. Club membership also entitles the producer the right to obtain 60% pre-financing from thosepurchasing their products as well as supposedly longer-term contracts in order to introduce more predictability and marketpower 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 toobtain a license from FLO. This license is different from a certification. The certification a producer’s cooperative obtainsshows that their products meet the standards of FLO. On the other hand, a retail license allows a firm access to theFairtrade markets in exchange for agreement to follow Fairtrade principles as well as paying a fee. It is the revenues fromthese licenses that guarantee a revenue stream for Fairtrade. ACORN International has learned firsthand of the ups and downs of the relationships between FLO and producingcooperatives through our partnership with COMUCAP, a small women’s coffee and aloe vera producing cooperative ofabout 200 members located in Marcala, Honduras in the state of La Paz. In trying to expand their sales of beans we hadexcellent meetings with Rob Clarke, Executive Director of Fairtrade Canada (www.fairtrade.ca) and his staff about how tohelp increase COMUCAP’s sales and outreach in Canada. During the meeting he confirmed on their international databasethat 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 Canadawas 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 ofexcitement has long dimmed since FLO will not move forward on creating the aloe vera certification process until the otherproblem is resolved, and the regional office in Central America responsible for this area of Honduras will not resolve thesuspension until they schedule a field visit, and now five months and counting, that visit has yet to be calendared, whilethese women are still stuck. Despite having been certified for more than a decade, COMUCAP and ACORN Internationalare 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

Un-Fairtrade Organization | 5low income producers. One of the authors has visited with many of these women in their clean and dirt floored homes andmet with them repeatedly, and these women should be first in line for a response from FLO, not somewhere between lastand whenever.Background PRODUCT CERTIFICATION DATES PRODUCT Certification DateThe concept of ‘fair-trade’ is not a new one. In 1946 a volunteer from theAmerican Mennonite Central Committee took samples of needle-work from Coffee 1988Puerto Rican women back to Pennsylvania, USA to sell to women in hercommunity. By 1970 this had snowballed into a chain of boutiques called Cocoa 1997SelfHelp that grew so large by the mid-1990s that it was renamed TenThousand Villages and by 2008 there were over 130 shops across North Sugar 1997 5America. In the second session of the United Nations Conference on Trade Tea 1996and Development there was a call for ‘Trade, not Aid’ which furtherpopularized the relationship between bettering the lives of those in the Flowers 2004developing world and international trade flows. Handicrafts were fair-trade’sfirst products. In the 1980s food commodities were welcomed into the fair- Rice 2001trade community. However, it was not until 1988 that certification and Cotton 2004labelling of fair-trade products was instituted by Max Havelaar of theNetherlands. Coffee was the first certified product and Mexico was the site of Bananas 1999the first certified producer organization. Fairtrade, the organization, wasfounded in 1997, building on Max Havelaar’s work, bringing nineteen national Wine 2003 6fair trade certification initiatives under the umbrella of FLO. Fairtrade (FLO) is the focus of this report.The Facts[All of the data used to create these tables is from Fairtrade itself and thereference, Fair Trade: A Human Journey, is a Fairtrade sponsored bookreleased in 2010. The data presented is that of 2008 and any growth rates arefrom 2007-2008 unless otherwise stated.]Before discussing the issues facing the structure of Fairtrade as well as thearguments for and against the organization and its system, it is important tolook at the cold, hard facts. We have presented these in the form of tablesand subsequent analysis, highlighting both obvious issues and those issuesthat 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.5 Fair Trade: A Human Journey6 Fair Trade: A Human Journey

Un-Fairtrade Organization | 6FAIRTRADE IMPORTS IN RELATION TO GLOBAL PRODUCTIONSPRODUCT Global Production Global Imports of FairtradeCoffee 7.8 million tonnes 65,808 tonnesCocoa 4.2 million tonnes 10,299 tonnesSugar 1.6 billion tonnesª 56,990 tonnesªTea 3.9 million tonnes 11,467 tonnesIn the sugar industry, global production measures the volume of sugar cane that is produced whereas global imports ofFairtrade measures the volume of sugar. Thus an apples-to-apples comparison is impossibleº Global production of cotton reflects the volume of cotton produced whereas global imports of Fairtrade reflects thenumber of items that contain Fairtrade cotton in them. Thus an apples-to-apples comparison is impossible.Fair Trade Retail Sales in Relation to ConventionalGlobal TradePRODUCT Global Trade Fairtrade Fairtrade % of Trade Retail SalesCoffee $11.1 billion $1.8 billion 16%Cocoa $8.4 billion $275.3 3.30% millionSugar $20.1 billion $257.4 1.30% millionTea $3.75 billion $294.6 7.90% millionFlowers $3.7 billion $256 million 6.90%Rice $10.5 billion $28 million 0.26%

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. PRODUCT % of Total RetailPerhaps one of the most striking conclusions that can be drawn from the import ($3.9 billion)data is the miniscule volume of Fairtrade production compared to global production. Coffee 46.20%Accounting for 46.2% of Fairtrade’s total retail sales, coffee is Fairtrade’s mostprofitable product. However, imports of Fairtrade coffee only represent 0.84% of Cocoa 7.06%global production. Those of the second most profitable product, bananas, are just Sugar 6.60%under half of that figure at 0.35% of global production. Retail sales of Fairtrade riceare a mere 0.26% of global trade and imports of rice are an almost non-existent Tea 7.60%0.0007% of global production. It is clear: Fairtrade is still a niche market. Flowers 6.60% What is interesting in looking at these three tables is that while the share of Rice 0.70%global production that Fairtrade imports is tiny, the retail sales of Fairtrade importsare a much larger percentage of global trade. Coffee’s 0.84% of global production Cotton 6.70%becomes 16% of global trade when you compare in monetary terms rather than in Bananas 16.90%weight. Wine 1.80% There are two reasons why Fairtrade products earn a greater share of global trade through their retail sales thantheir import’s share of global production would suggest. The first is that Fairtrade products, by their nature, carry a muchhigher price than non-Fairtrade products. This is because license fees raise the marginal costs for retailers as do premiumsand price-floors. To be fair to Fairtrade, these figures reflect that products are being sold at higher prices on the Fairtrademarkets and thus Fairtrade’s structure does accomplish one of its main missions. However, the impact of these higherprices 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 worldfarmers. 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 thecountry in which it is produced. While not as extreme as rice, other Fairtrade certified products also fall into the categories of goods that do notnecessarily cross borders. However, even with this in mind, Fairtrade still represents a very small share of goods that doactually get traded. Even with higher retail prices, Fairtrade retail sales across these nine products still accounts for only4% of global trade. We have compared Fairtrade imported volume to global production rather than global trade volumebecause we lack the figures to do the latter comparison. However, with rice we know that 7% of global production crossesinternational borders making global trade 45.6 million tons. Of this, 0.001% is imported as Fairtrade. Therefore theconclusion that Fairtrade imports represent a very small share of global trade, based on their relationship to globalproduction, remains valid.

Un-Fairtrade Organization | 8 A large part of the economic argumentagainst Fairtrade is that price-floors create softbudget constraints for producers and create perverseincentives to produce beyond the point of marketequilibrium. In basic supply and demand theory, whenproduction increases, prices fall (as there is moresupplied than demanded). The decrease in price ismeant to be a signal from the market to the producersto produce less. However, with the institution of aprice-floor this signal never gets through andFairtrade farmers continue to produce because theyare guaranteed a minimum price. This is good for thesmall percentage of the world’s marginalized farmersthat are allowed into the Fairtrade club, but for thosewho either are landless, illiterate or unable to join a 3: Fair Grinds Coffee in New Orleanscooperative for one reason or another, overproduction by Fairtrade farmers means that prices tumble for everyone else. It is because of this negative knock-on effect 7on poor farmers that Peter Griffiths argues that Fairtrade causes death and destitution. Recently, a New York Times articlereferenced a study that has linked poverty to death in the United States (in the same manner that cigarettes have been 8linked to death). If such a link can be found in the world’s largest economy, then it is certain to also apply to developingcountries. Given such findings, Griffiths’ claim of Fairtrade causing death and destitution by consigning non-Fairtradefarmers 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 shareof global trade, Fairtrade farmers are incapable of flooding the markets and thus are not capable of having a huge impacton global prices. This is a very valid argument. However, Fairtrade is growing bigger and bigger all the time. Not only do itsproducts experience high growth rates (see table below), but consumers have begun to ‘vote with their feet’ and demand 9Fairtrade goods. In 2009 Starbucks committed to doubling its purchase of Fairtrade coffee. Though this still only 10represents 10% of Starbucks total imports, it represents almost a third of the world’s imports of Fairtrade coffee. WholeFoods has also started offering a Fairtrade brand and university campuses are becoming Fairtrade campuses (including theuniversity of one of this report’s authors, the University of Edinburgh). These examples are important because each ofthem represent a case where Fairtrade has been demanded by consumers. Whole Foods originally rejected the idea of a 11Fairtrade product because they were not satisfied with Fairtrade’s operational structure. Starbucks also prefers its ownCoffee and Farmer Equity Practices (CAFE Program) to the Fairtrade model. Without involving price-floors, premiums,7 Griffiths, Peter, ‘Ethical Objections to Fairtrade’http://www.griffithsspeaker.com/Fairtrade/ethical%2027%20JAN%202011%20for%20web.pdf8 New York Times ‘Researchers Link Deaths to Social Ills’http://www.nytimes.com/2011/07/05/health/05social.html?_r=2&ref=health9 The Economist ‘Voting With Your Trolley’ http://www.economist.com/node/8380592?story_id=E1_RPRDVJN10 Fairtrade: A Human Journey11 Haight, Colleen ‘The Problem with Fairtrade Coffee’ http://www.chaight.com/Problem%20with%20FT%20Coffee.pdf

Un-Fairtrade Organization | 9certification or licensing fees, CAFE seeks to promote traceability of the product through detailed production and practice 12descriptions. Massive trans-national corporations are also turning to Fairtrade, including Cadbury whose launch of the Fairtrade 13dairy milk chocolate bar was set to double the amount of Fairtrade chocolate bars purchased in Canada. Even Nestlé, theSwiss giant that is constantly under attack for the way it does business, has been able to sell some Fairtrade certifiedproducts. This has led to accusations of ‘fair-washing’ pointed at large retailers who are attempting to improve their publicimage 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 andincreasing pressure from consumers for Fairtrade products, it has great potential to grow into something much larger. Theargument for Fairtrade that dismisses the prospect of the negative ramifications of overproduction has weight only whenFairtrade is small. The more Fairtrade grows the more likely it becomes that the overproduction scenario will occur and thefact 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 % of CFTOs 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 Development13 Fairtrade: A Human Journey

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. withwage labourers). Small Producers’ Associations versus Salaried Workers Organizations PRODUCT Small Producers Associations Salaried Workers Organizations % SWO (SWO) 4COMUCAP coffee processing Tea 31 43 58.80% Flowers 0 46 100% Bananas 28 35 55.60% Wine 4 23 85.10% %OF Over all 9 Products: 79% 19.80% TOTAL The two tables above give an overview of how many certified organizations make up the Fairtrade movement. Intotal, Fairtrade had 746 certified organizations in 2009. Of these 746, small producers’ associations accounted for 541 andsalaried workers’ organizations for 205. As can be predicted from the figures in the first set of tables, the bulk of thecertified organizations produce coffee (291 organizations making up 39% of the total). It is interesting to note that the twoproducts with the next largest numbers of certified organizations allow certification of salaried workers organizations. Infact, not only do they allow labour-based organizations, but the majority of certified organizations in tea and bananas arewage labour-based (55-60% each). In the flowers sector, 100% of certified organizations use hired labour. So even thoughsmall producers’ associations are just under 80% over all nine products, of the largest products (in volume of imports aswell as amount of retail sales), many are using hired labor. Certifying organizations employing hiredlabor has always been a very contentious issue, bothoutside the Fairtrade community and within. Whentea plantations started to obtain Fairtradecertifications for their products in 1996 there was agreat outcry, especially from the coffee sector.Fairtrade is based on the idea of empowering farmersand allowing them to wield more market power intrade negotiations by grouping them intocooperatives of small farmers who do not employ fulltime labor. Fairtrade is membership fee chargingclub. To join you pay a membership in the form of a

Un-Fairtrade Organization | 11certification fee (paid by the cooperative and normally in the range of $2,000-$4,000 (USD) annually). If you are a smallfarmer and want to sell organic goods (and there is a very strong correlation between consumer demand for Fairtrade anddemand 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 cooperativebureaucracies, Fairtrade is simply inaccessible to many marginalized farmers who could really benefit from the safety netof a price-floor and the promise of higher prices. For an example of such bureaucracy and complication one only need lookas far as the standards a Fairtrade certified organization needs to meet; they are thirty-one pages long! So when Fairtradestarted to certify organizations that used hired labor, jealousy was rife. Fairtrade requires organizations to allow workers toorganize, create a framework for collective bargaining and spend premiums on improving the living conditions of theirworkers. However, it was found that in some tea plantations, workers do not see anything of the premium for years and 14when they finally do, it is not in a direct cash transfer, but rather in the form of a laundry basket or a thermos. Inspectionsof Fairtrade certified organizations are carried out annually, but are announced ahead of time and there is much proof ofplantation owners sprucing up living areas and coaching workers on what to say ahead of time in order to cover up poor 15working conditions. In Nilgiri Hills, India it was found that tea estate workers were unaware that a premium was beingpaid for their tea on top of the purchase price. They laughed when they heard that consumers in developed countries were 16paying more for the tea they produced thinking it was improving the living conditions of marginalized farmers. Fairtradeclaims that its labor-based certified organizations pay at least the minimum living wage, but there has been much proof 17that this has not been the case. The problem is, there is no way for Fairtrade to monitor what these organizations arepaying their workers (it would be absolutely impossible to do) and their annual inspections are neutralized by the fact thatthey are pre-announced and therefore involve elaborate preparations. When Fairtrade touts its support of cooperatives, itis 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 intomore detail a bit later on. United Kingdom’s Role in Fairtrade14 Tom Heinemann’s documentary ‘Bitter Taste of Tea’ as referenced in TheTimeshttp://www.timesonline.co.uk/tol/news/uk/article5429888.ece15 The Times ‘Case Study: Kenya: Workers Deprived of Dignity’http://www.timesonline.co.uk/tol/life_and_style/food_and_drink/article5429873.ece16 The Times ‘Case Study: India: ‘Nothing is Done to Help Us’http://www.timesonline.co.uk/tol/life_and_style/food_and_drink/article5429872.ece17 Financial Times ‘The Bitter Taste of Fairtrade Coffee’ and ‘Fair Workers Paid Below Minimum Wage’http://www.ft.com/cms/s/2/d191adbc-3f4d-11db-a37c-0000779e2340.html#axzz1RXKDPnIohttp://www.ft.com/intl/cms/s/2/46cd2578-3f5a-11db-a37c-0000779e2340.html#axzz1RXKDPnIo

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 18Fairtrade’s global sales. Of the nine products referenced in this report, the United Kingdom imports a majority ofFairtrade imports of four of them, just under half of one of them, an insignificant amount (relative to other Fairtradeimporting countries) of one of them (rice) and around a third of another two. The product for which the United Kingdomplays the least significance, besides rice, is in coffee. The United Kingdom’s 81.4% share of Fairtrade tea imports helpsexplain this. Put simply, British consumers prefer tea to coffee. There can be no doubt that the United Kingdom is a verylarge player in the Fairtrade market.18 Fairtrade: A Human Journey

Un-Fairtrade Organization | 13 This already significant role is on a path to expansion. Growth rates for importation of Fairtrade to the UnitedKingdom top those for the overall global growth rate in five of the seven products for which we have data. Thus, today theUnited 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 theFairtrade market. As it will be seen below, not only do ACORN International affiliates house a significant amount ofFairtrade certified organizations within their borders as producers, but Canada and the United States are also importantplayers as importers. With interests on both sides of the production and consumption relationship, Fairtrade is something that has thereach 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 theconsumers 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

Un-Fairtrade Organization | 14 PRODUCT Fairtrade % Global % Total Fairtrade Imports Imports Production 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 1925.6%. 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 signedtheir 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 andmore 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 20global Fairtrade sales. Despite being newer to the game, Canada made a strong showing in 2007-2008 experiencing a 2167% growth rate in the purchase of Fairtrade goods thus putting total Fairtrade sales just shy of $200 million. With theCadbury-Fairtrade deal mentioned earlier in the report, Canadian sales of Fairtrade chocolate bars were set to double andthe 251% growth rate in tea well exceeded the 112% sector rate. With statistics like these it is clear that Canada is acountry 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 MEXICO19 Fairtrade: A Human Journey20 Fairtrade: A Human Journey21 Fairtrade: A Human Journey

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 Fairtradeorganizations that produce cotton are located in India and just shy of half of flower growing certified organizations are inKenya. In eight of the nine products this report discusses, production occurs within at least one of ACORN International’saffiliates. With members on both ends of the trading relationship it is clear that ACORN International has an interest in theworkings of Fairtrade. Whether it is unfair to the producer, consumer or both (as we believe it may be), our members arebeing affected.

Un-Fairtrade Organization | 16ISSUES It is at this point in the report that we will expand upon some of the issues that have been brought up in ourinterpretation 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 22is ‘helping the third world’. There are also studies showing that an increase in the cost of a cup of conventional coffeedecreased the amount bought by consumers, but there was little to no effect of a similar increase on Fairtrade coffee. In theUnited Kingdom, a major coffee retailer, Costa, admitted that of the extra 10p (16cents US) that they charged on Fairtradecoffee, they pocketed 99% of it. Peter Griffiths goes on to explain that those 16cents would have had 100 times the impact 23if they had been directly donated to a high impact charity (which Fairtrade is not). Because the consumer believes thatthe extra money they are paying is going towards a charitable purpose, a substitution effect may occur and thus they willbe 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 peoplethey are trying to persuade to follow it’. It is by this definition that David Henderson argues Fairtrade is unfair and 24considering the previous paragraph it is easy to see where his argument has strength. People who pay higher prices aretrying to do well by the producers in developing countries, but they often do not realise that the extra money they arepaying for a Fairtrade product has no relationship whatsoever with the money that actually gets back to the producer. On 25Fairtrade’s website they even admit that they have no say in what a retailer charges for its certified products. This is oneof Peter Griffiths’ greatest issues with Fairtrade: it is impossible to know how much of the extra paid by the consumeractually gets back to the producer. Unlike ethical trading schemes that put stickers on products telling you exactly howmuch of your money goes back to the producer, the consumer who purchases Fairtrade is left very much in the dark. It isbecause 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 moredifficult to figure out exactly how much benefit individual farmers get from the premiums received. Giving money tocooperatives is supposed to support democracy and collective well-being. Cooperative members are meant to vote on howto use the premiums. Schools, roads and better farming equipment have been cited as examples of uses of premiums thatimprove the living conditions of cooperative members and their families. However, as was seen with the tea and flowerproducing organizations with hired labor, most marginalized laborers have no knowledge of this premium and some evenlaughed at the notion that it existed (see above).22 Peter Griffiths speaking at the UK Coffee Leaders Summithttp://www.ukcoffeeleadersummit.com/files/videos/ukcls2010/UKCLS2010-Speaker14-Peter-Griffiths.html23 Griffiths, Peter, ‘Ethical Objections to Fairtrade’http://www.griffithsspeaker.com/Fairtrade/ethical%2027%20JAN%202011%20for%20web.pdf24 Henderson, David ‘Fairtrade is Counterproductive and Unfair’ in Economics Affairs25 http://www.fairtrade.net/?id=361&L=0

Un-Fairtrade Organization | 17 In 2010, over $10.8 million in coffee premiums were delivered to producers (and as an interesting tie to ACORN 26International, 23% of them went to Peru). While this sounds like a very healthy amount, for stronger cooperatives it hasbeen seen that 50% of received premiums go towards the administrative costs necessary for making sure that theirproduct continues to meet the ‘tick boxes’ of Fairtrade certification. Weaker cooperatives who only manage to sell 10-20% 27of their product as Fairtrade spend all of the premiums they receive on keeping up with Fairtrade standards. Consumerstrust 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 andpromoting the highest standards of integrity, transparency and accountability in order to maintain and protect that 28trust”. 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 characteristicslike 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 otherproducts through our partnership with Fair Grinds Coffeehouse (www.fairgrinds.com) in New Orleans, the oldest 100% fairtrade house in the city for over 10 years. Perhaps it is needless to say, but in a competitive environment with Starbucksand local chains, the coffee, whether fair trade or not, has to be priced competitively at Fair Grinds, regardless of thepremium paid, as we have discussed, for the producer, or the mark-up by the broker and roaster to supply such coffee. Infact we might even argue that a fair-trade only purveyor, like Fair Grinds, might even be at a competitive disadvantagecompared to other coffee operations able to source more cheaply and set the prevailing rate for a cup of coffee, whichmany customers already believe is too pricey. The confusion in the marketplace on the various claims of fair-trade and theincreasingly crowded field of certification and certifiers between Fairtrade (FLO), Rainforest Action Network, and othersalso means that an operation trying to play fair with its customers, like Fair Grinds, is unable to successfully communicatean argument for a price differential when its own customers “don’t know beans.” Fair Grinds Coffeehouse has created adirect relationship to support ACORN International organizing in Peru, Mexico, and Honduras where they are able tosource the beans at the Port of New Orleans in order to make sure that poor people in these countries actually benefit, andis negotiating to begin buying directly from COMUCAP in Honduras and other suppliers to take the brokers out of thebargain 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 http://www.transfairusa.org/sites/default/files/Almanac%202010_0.pdf27 Peter Griffiths speaking at the UK Coffee Leaders Summithttp://www.ukcoffeeleadersummit.com/files/videos/ukcls2010/UKCLS2010-Speaker14-Peter-Griffiths.html28 Charter of Fairtrade Principleshttp://www.fairtrade.net/fileadmin/user_upload/content/2009/about_us/documents/Fair_Trade_Charter.pdf

Un-Fairtrade Organization | 18UNFAIR FINANCES One of the benefits of being part of the Fairtrade club is supposedly better access to financing. Retailers and 29wholesalers who purchase from cooperatives are meant to be able to pre-finance 60% of the contract price on request.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 rightafter you harvest and nothing much in between. Access to credit allows farmers to ease their budgetary constraints andsmooth their consumption. It also gives them confidence to invest in their business since with a longer-term contract theyhave less fear of incurring sunk costs from which they will never recover. Reducing volatility and unpredictability is ahallmark 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 30often pre-finance at an interest rate of 11%, Fairtrade financing usually comes at a price of 18-22%. One could attempt todispel this argument by saying that Fairtrade financing is guaranteed in a manner that producers can trust, but that stilldoes not take away from the fact that 18-22% is a very steep price to pay, especially for developing world farmers. LauraReynolds argues that ‘market-driven’ firms attempting to ‘fair-wash’ (to look better in the consumers’ eyes who areincreasingly demanding Fairtrade products) often argue that they are in the business of buying commodities, notfinancing. She goes on to point out that these ‘market-driven’ firms are often the biggest purchasers of Fairtrade (we haveseen that Starbucks accounts for one third of Fairtrade coffee sales) and thus producing cooperatives are afraid that if theydo 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 31certification. This fear of failing to sell their products at the Fairtrade price is very real. Fedecocaua, the largest Fairtradecertified 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 32they specifically cited the reason to be a lack of buyers. In 1998 it was reported that certified coffee cooperatives wereselling 10% of their product as Fairtrade on average. Today this number has risen to 50% according to Fairtrade, but 33anecdotes such as those from Fedecocaua and Coocafe cannot be disregarded. In order to sell any of your product as Fairtrade you need to pay to be certified and pay costs to undergo annual 34inspections. It is easy to see why Fairtrade may not be worth it for the producer when they are paying steep prices to sellsuch a small percentage of their product at the Fairtrade price. It is also clearer now why so much of the premiums that arereceived by cooperatives go towards meeting Fairtrade standards and certification costs. It is for this reason that somecooperatives have actually left the Fairtrade family.29 Reynolds, Laura, ‘Mainstreaming Fairtrade Coffee: From Partnership to Traceability’ in World Development30 Valkila, Joni, ‘Fairtrade Organic Coffee Production in Nicaragua: Sustainable Development or Poverty Trap?’ in EcologicalEconomics31 Reynolds, Laura, ‘Mainstreaming Fairtrade Coffee: From Partnership to Traceability’ in World Development32 Berndt, Colleen, ‘Does Fairtrade Coffee Help the Poor?’http://mercatus.org/sites/default/files/publication/Fair%20Trade%20Coffee.pdf33 Fairtrade: A Human Journey34 Henderson, David ‘Fairtrade is Counterproductive and Unfair’ in Economics Affairs

Un-Fairtrade Organization | 19UNFAIR 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 commoditymarket price of the product increases, so does the Fairtrade price-floor and the premium guarantees that Fairtradeproducts should always fetch a price above the market. However, in reality, what is meant to be a price-floor oftenbecomes a price-ceiling. Market-driven firms who are seeking to placate consumers by offering Fairtrade brands will oftenrefuse 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 inorder to obtain a license to sell Fairtrade goods. It is this license that makes up the bulk of Fairtrade’s income at 70% in theUnited States and 85% in the United Kingdom (with the rest of the income in the form of donations or subsidies from DFID 35and USAID among others). It is important to note that these license fees do not make it back to the producers and in the 36United Kingdom 70% of the revenue from the fees is used to advertise the Fairtrade brand within the country. It is because of the profit maximizing drive and sheer size of the trans-national firms that they have the incentiveto both purchase the product at the lowest price possible (so as to make up for paying a license fee) and bully producersinto 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 areessentially two coffee markets: the normal one and the specialty one. Coffee prices are set on the normal market based onthe quality of the bean and standards are extremely strict. However, the specialty coffee market represents an extremelywide variety of coffees thus comparison is often impossible. Fairtrade coffee is considered a speciality coffee and is thussold on the specialty coffee market. Since the Fairtrade price-floor is based on the market value of coffee, situations arisewhere 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: producersare better off selling their lower grade coffee as Fairtrade and their higher grade coffee not as Fairtrade as they will fetch abetter price for it on the non-specialty market. The result of these perverse incentives is that Fairtrade consumers receive lower quality coffee. This is yetanother way Fairtrade is unfair to both producers and consumers.35 Griffiths, Peter, ‘Ethical Objections to Fairtrade’http://www.griffithsspeaker.com/Fairtrade/ethical%2027%20JAN%202011%20for%20web.pdfandHaight, Colleen ‘The Problem with Fairtrade Coffee’ http://www.chaight.com/Problem%20with%20FT%20Coffee.pdf36 Griffiths, Peter, ‘Ethical Objections to Fairtrade’http://www.griffithsspeaker.com/Fairtrade/ethical%2027%20JAN%202011%20for%20web.pdf

Un-Fairtrade Organization | 20POTENTIAL FOR POSITIVE? We have looked over many of the issues that infect the Fairtrade system. However, we must also acknowledgethe positive. While the price-floor has its flaws, especially within the coffee sector, and the money that gets back to thefarmers is not as significant as Fairtrade would like us to believe, it has played a positive role in the past. During the coffee stcrisis at the beginning of the 21 century, prices paid to coffee producers dropped to a 100-year low. Murray, Raynolds andTaylor found that the price-floor of Fairtrade coffee played a significant role in helping small producers weather the 37economic storm. Bradley Wilson also found that in 1998 in Nicaragua after Hurricane Mitch struck, price-floors were ofmassive help. However, he also says that Fairtrade should “offer more than a means of basic survival” and that while it is an 38effective safety net, Fairtrade is not the magic bullet its promoters would like to advertise it is. What we can take from this is that guaranteed higher income is beneficial for producers in developing countries asit greatly reduces the amount of risk and volatility in their economic lives. However, it is important to remember that aFairtrade price-floor is not the only way to boost income and there are many more lower-cost, higher-impact projects outthere that are much more effective. At the end of the day, what these producers need is simple: increased income. PeterGriffiths says that he is only concerned with “cash in the pocket” and it is clear that while Fairtrade can help out in times of 39great need, it does not provide this necessity on a day-to-day basis.CONCLUSION This report began with an explanation of Fairtrade’s lofty claims of creating a better deal for the developingworld’s marginalized producers. It now ends having challenged that claim and it can only be concluded that reality showsthat Fairtrade does not live up to it. More importantly, it has been shown that it is not just an issue of lax oversight andmanagement on behalf of Fairtrade, but more crucially it is an issue seated at the very core of Fairtrade’s operationalstructure. Rather than helping the marginalized producer, Fairtrade’s greatest impact has been to allow trans-nationalfirms 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 consumersalike, 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, butconfronted with the evidence, it is clear that Fairtrade is not the way to reach such a goal. There is no substitute for cash inthe pocket as the most effective form of direct money transfer that improves the lives of lower income families. Fair-tradeinitiatives that are transparent in telling exactly how much money goes back to the producer and that do not require acertification organization as a middle-man are much more effective than Fairtrade. Every penny spent on Fairtrade is apenny 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 aboutremedying the situation. thAuthors’ Note: On September 15 , 2011 Fair Trade USA announced their decision to split from the international organizationFairtrade. Chief executive Paul Rice justified the move claiming the organization was “after results” (a very market-oriented37 Murray, Raynolds and Taylor, ‘One Cup at a Time: Poverty Alleviation and Fairtrade in Latin America’http://welcome2.libarts.colostate.edu/centers/cfat/wp-content/uploads/2009/09/One-Cup-at-a-Time.pdf3838 Wilson, Bradley ‘Indebted to Fairtrade? Coffee and Crisis in Nicaragua’ in Geoforum39 Peter Griffiths speaking at the UK Coffee Leaders Summithttp://www.ukcoffeeleadersummit.com/files/videos/ukcls2010/UKCLS2010-Speaker14-Peter-Griffiths.html

Un-Fairtrade Organization | 21 iresponse from the head of an organization whose founding principle was to create an alternative to market-capitalism). Thismove has caused uproar within the Fairtrade community as light is increasingly being shed on the unfair nature of an ethicaltrading system that supposedly exploits the developed world’s markets to the benefit of developing world producers. Thisarticle, written in July-August 2011, exposes the pitfalls and corresponding concerns pertaining to the international Fairtradesystem. Fair Trade USA’s move in September only serves to justify existing anxieties and adds further weight to the argumentthat Fairtrade is, in reality, anything but fair, especially since the Fair Trade USA action is seeking to dilute, what we have showin 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 th th Business Week, ‘An American Rebel Roils Ethical Commerce’ (November 7 -13 , 2011).

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ACORN International Fairtrade Report

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