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Fairtrade Coffee: Does a coffee a day keep poverty away?


Thao-Mi Bui

By

October 12th, 2017


Many students would argue that coffee is the primary causal factor behind their success. Is it also the key to success for those in poverty? Thao-Mi Bui investigates.


Coffee can jolt you awake, but can it drag millions of coffee farmers out of their bed of poverty? Here we investigate whether Fairtrade delivers on its goal of a ‘better deal for farmers and workers’ and explore what’s required to lift people out of poverty.

Introduction to the mechanisms of Fairtrade

The Fairtrade mark is designed to promote sustainable farming and improve the welfare of producers.

To gain the certification, producers must comply with environmental and working condition standards. In return, producers are guaranteed a minimum price negotiate even higher prices. They are also paid a premium on top of the minimum price that is set aside for community development. Buyers must enter into long term contracts of at least one year and provide advance crop financing as requested. [1]

Fairtrade effectiveness

Designed as an income ‘safety net’, the price floor is the feature that is most valued by farmers, and has been effective in stabilizing producers’ income. [2] When global coffee prices reached a low from 2000-2004, Fairtrade farmers received more than double what conventional farmers earned. [3] However, the price differential converged as prices recovered around 2004 and on average, Fairtrade producers receive only $0.04 more per pound of coffee than conventional farmers.  Their income is higher, but the scale of the impact on income is quite weak. [4]

Moreover, it is difficult to ascertain whether there is a direct causal link between Fairtrade certification and higher income, or whether it is the result of pre-existing characteristics. Does a farmer earn more because they became certified or because they have the entrepreneurial zeal to become certified and run a successful farm in the first place? Evidence thus far actually implies negative selection bias, where producers with lower education and smaller farms, are more likely to seek certification. [5] This suggests that the benefits of Fairtrade may actually be understated.

After income stability, a producers’ second most valued feature of Fairtrade is greater access to credit. 77% of Fairtrade producers reported grants of pre-harvest credit, whilst only 33% of conventional farmers did. [6] This tides them over until payday, enhancing financial stability throughout the seasons.

There’s no doubt the Fairtrade system has transformed the lives of farmers. For those in the Fairtrade game, life is less volatile. Whilst income has been the most widely researched outcome, there are qualitative studies and a limited number of empirical studies which highlight positive correlations between Fair Trade and health, education and food security. [7] Despite this, there remain key areas for improvement.

Key areas requiring improvement

1: Distribution of gains between producers and retailers

As consumers, we are left wondering where the premiums we pay for Fairtrade go. Sales are 10% greater when coffee is labelled as Fairtrade and sales rise by 16-33% when the Fairtrade mark is combined with another 10-20% markup in price. [8] This is most likely because the markup is associated with a higher quality product in consumers’ eyes. However, whether consumers’ willingness to pay more comes out of goodness of the heart or simply a desire for more quality, it unfortunately does not translate into greater benefits for farmers. 60% of the retail price of a coffee is pocketed by retailers in the consuming country but only 35% returns to the producing country. [9] Strengthening producers’ bargaining power when it comes to negotiating prices is integral to accelerating improvement in the lives of farmers.

2: Distribution of gains between farm owners and hired workers

There are also concerns with the distribution of income gains from the minimum price. 110,000 individuals in Costa Rica interviewed annually from 2003-2010 revealed that Fair Trade farm owners received higher incomes but hired workers did not. Similar studies uncovered the same story in Mexico and Nicaragua. [10]

3: Use of the Fairtrade premium

The use of the premium also has yet to achieve its potential. There is widespread lack of transparency and awareness of the premium by producers. Additionally, community growth is stunted because some Fairtrade farmers are hesitant to use the funds for community-wide development as it would benefit others who did not work for it. In such cases, the funds remain idle. [11]

In light of this, the astounding impact of the Fairtrade system is not to be discounted; there is simply room for improvement. Indeed, Fairtrade International commissions two to three outcome and impact evaluations annually. [12] In September 2017, they enlisted Overseas Development Institute to review the literature on Fairtrade. From this, Fairtrade proposed changes to its guidance on planning and managing the Fairtrade premium amongst other initiatives. [13]

The role of Fairtrade in development

Fairtrade is powerful in that it has allowed farmers to make a stable living, but it is not a way to make a fortune. Fairtrade has delivered on its promise of getting a ‘better deal for farmers and workers’ and moving them from a ‘position of vulnerability to security and self-sufficiency’, but subsistence from a day to day basis is merely the beginning. Studies suggest that Fairtrade farmers which exited the coffee market after a price boom and used the short-term gains to invest in education or international migration saw greater improvement in long-term welfare. [14] A coffee a day can’t keep poverty away, but it can help.

Image source: http://eskipaper.com/images/coffee-ying-yang-1.jpg

Reference List

[1] Fairtrade International. (2017). The Fairtrade System. Retrieved from https://www.fairtrade.net/about-fairtrade/fairtrade-system.html

[2] Overseas Development Institute. (2017). The impact of Fairtrade report. London, UK: Author.

[3] Overseas Development Institute. (2017). The impact of Fairtrade report. London, UK: Author.

[4] Dragusanu, R., Giovannucci, D., & Nunn, N. (2013). The Economics of Fair Trade. (First version prepared for the Journal of Economic Perspectives). Retrieved from http://scholar.harvard.edu/files/rdragusanu/files/jep_firstdraft_sept10_2013.pdf

[5] Dammert, A., & Mohan, S. (2014). A Survey of the Economics of Fair Trade. (IZA Discussion Paper No. 8167). Retrieved from http://ftp.iza.org/dp8167.pdf

[6] Dragusanu, R., Giovannucci, D., & Nunn, N. (2014). The Economics of Fair Trade. Journal of Economics Perspectives, 28(3), 217-236.  Retrieved from http://scholar.harvard.edu/files/rdragusanu/files/jep_firstdraft_sept10_2013.pdf

[7] Dammert, A., & Mohan, S. (2014). A Survey of the Economics of Fair Trade. (IZA Discussion Paper No. 8167). Retrieved from http://ftp.iza.org/dp8167.pdf

[8] Dragusanu, R., Giovannucci, D., & Nunn, N. (2014). The Economics of Fair Trade. Journal of Economics Perspectives, 28(3), 217-236.  Retrieved from http://scholar.harvard.edu/files/rdragusanu/files/jep_firstdraft_sept10_2013.pdf

[9] Valkila, J., Haaparanta, P., & Niemi, N. (2010). Empowering Coffee Traders? The Coffee Value Chain from Nicaraguan Fair Trade Farmers to Finnish Consumers. Journal of Business Ethics, 97, 257-270. doi: 10.1007/s10551-010-0508-z

[10] Dragusanu, R., Giovannucci, D., & Nunn, N. (2013). The Economics of Fair Trade. (First version prepared for the Journal of Economic Perspectives). Retrieved from http://scholar.harvard.edu/files/rdragusanu/files/jep_firstdraft_sept10_2013.pdf

[11] Overseas Development Institute. (2017). The impact of Fairtrade report. London, UK: Author.

[12] Fairtrade International. (2017). Evaluation and Research. Retrieved from https://www.fairtrade.net/impact-research/evaluation-research.html

[13] Fairtrade International. (2017). The impact of Fairtrade: a review of research evidence. London, UK: Author.

[14] Barham, B., Callenes, M., Gitter, S., Lewis, J., & Weber, J. (2011). Fair Trade/Organic Coffee, Rural Livelihoods, and the “Agrarian Question”: Southern Mexican Coffee Families in Transition. World Development, 39(1), 134-145. doi: 10.1016/j.world.dev.2010.08.005

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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