Tag Archives: SRI

A simple solution to the Fair Trade coffee problem?

By Lauren Burnhill aka @LaurenOPV

At first, Fair Trade coffee was expensive and scarce. Purchasing it was a mark of conscious consumerism, which is desirable from a sustainability optic even if you’re not a hipster. Next, global coffee prices shifted and Fair Trade coffee became affordable but of varying-and not always good-quality. Now many more consumers know about and can afford Fair Trade coffee, but they may not want to.  I think a sustainable world will be one in which we enjoy living rather than one of scarcity and sacrifice. So why can’t Fair Trade coffee and a good morning cup of Joe go hand-in-hand and what can we do about it?

You’ll find some great insights in Colleen Haight’s recent article in the Stanford Social Innovation Review: The Problem with Fair Trade Coffee. What follows is a brief recap of how I see the problem, followed by my proposed solution. The first bottom line on the problem seems to be that regular coffee is priced based on grade, while Fair Trade coffee is all lumped together as “Fair Trade”. When the regular graded price is higher than the Fair Trade price, “Fair Trade” often nets the lower quality coffee. This makes sense if farmers want to maximize their income. Further, if they also meet their Fair Trade delivery commitments, the quality issue isn’t their problem.

The second bottom line is that one of the dynamics behind Fair Trade certification is that producers offer fair wage and working conditions to workers. The (notional) premium on Fair Trade coffee is intended not only to cover certification and reporting costs, but also to provide better outcomes to workers as well as to farm owners and co-ops. Unfortunately, workers and small holders rarely see much in the way of direct benefits. Money that flows into large farms and co-ops is typically invested in new infrastructure and facilities (or returned to owners), with little focus on directly improving the lives of those at the base of the supply chain.

Given this definition of the bottom line problems, the solution to the Fair Trade coffee problem seems so simple to me that I’m sure I must be missing something.  Currently, Fair Trade coffee is not graded. All Fair Trade coffee commands a single price, so when regular prices are high, growers sell high-grade coffee at a premium on the regular market and sell lower quality beans as Fair Trade coffee at the fixed price. We could eliminate this trade-off in two ways. First, we need to grade all coffee, Fair Trade or “regular”. Today, 96% of the $14 billion coffee market is regular coffee and only 4% Fair Trade certified. In other words, most coffee is already being graded. Grading an extra 4% of output can’t be an insurmountable obstacle. Take this idea a step further.  If a happy sustainable world is one in which all coffee trade – indeed all trade – is fair, and if coffee prices are set on the basis of quality, then ipso facto all coffee must be graded as a precondition of sustainability.

Next, the price of Fair Trade coffee involves a price floor of $1.40/lb, indexed to commodity grade coffee prices on the NY Coffee Exchange. If commodity coffee is priced at $1.40/lb, the Fair Trade price would be $1.60. So far so good. If the Fair Trade price is $1.60/lb but the graded price for the same coffee beans is $2.00/lb, the producer is better off selling those beans at $2.00/lb and finding lower quality beans to sell at the Fair Trade price. How “fair” is that fair trade price if quality is not part of the equation? If Fair Trade coffee is graded, each Fair Trade grade can be priced in juxtaposition to the equivalent grade regular coffee. If we had graded Fair Trade coffee, assuming the same $0.20 premium applied to each grade, the coffee beans discussed above would have sold as Fair Trade coffee at $2.20/lb. The farmer comes out ahead financially and the coffee drinker can buy and enjoy a known-quality Fair Trade product.  Let the consumer decide if it’s worth paying a small premium to make the planet a better place. Without giving up good coffee!

Speaking of making the world a better place, let’s look at the second bottom line issue. One challenge for fair trade is the need to aggregate small farmers so that training, education, purchasing and distribution can happen efficiently. Co-ops are a relatively common and often appropriate solution to collaborating as a group without foregoing individual rights and privileges. Co-ops, by their structural nature, can be hard to govern though and the quasi–corporate entity can become more important than the individual members. When Fair Trade coffee prices are high and co-ops realize a surplus, they may reinvest everything in new laboratories, offices or inspection vehicles (which is great in one sense) but never return cash or other benefits directly to its members.

Like leaders since the dawn of time, co-op managers want to be remembered for doing great things for the collective; things that will be remembered and talked about. A community center is a good thing for co-op members and their families and they are likely to remember the person who made it happen. Small dividend payments don’t necessarily bring the same degree of ego satisfaction, but they can have significant impact. Large farms, belonging to a single owner or a small group of shareholders (who are not necessarily also workers), have less incentive than co-ops to invest in things that benefit workers versus things that boost farm profitability. Paying fair wages may seem like enough, but going beyond that fairness floor can produce gains for owners as well as workers. The payoff may appear in the form of increased productivity, greater loyalty, reduced turnover or indirectly by, for example, making it possible for enough students to attend a local school that the school stays open and can operate sustainably.

Think of it this way. If I give you access to two tractors, your workload will be easier and maybe your productivity and income will rise. If I give you access to one new tractor plus $100, you may choose to send your daughter to school, buy a solar home generator, invest in proper rainwater collection systems or get the families teeth looked at. Every one of those actions lays the groundwork for greater productivity and social impact: an educated future workforce, longer hours to work study or relax at home, less time fetching water and fewer waterborne diseases. Plus, the one tractor is providing at least some of the easier workload/higher output benefits of the two tractor scenario Net-net, society, the co-op and the households of each co-op member are better off in the “one tractor plus dividend” world. At minimum, they enjoy greater freedom of choice to achieve self-determined economic and/or social goals.

Check out what GiveDirectly.org is doing in Kenya if you want to see an interesting model for empowering the poor to make their own decisions about how to improve their socio-economic well-being! In the early days of BancoSol, I often wondered if we might not be able to help a larger number of people by just giving money away on the street corner instead of creating expensive credit systems and infrastructure. These days, I believe that formal access to finance is critical for economic growth and development, but I also believe that individuals have different priorities when it comes to “access to life” issues. I may want to send my daughter to school more than I want a clean-power cook-stove. My neighbor might want a bicycle so that he can get home from work while his children are still awake. His neighbor may want a filtered rainwater collection system because his wife was seriously ill from a waterborne disease last year. What is certain is that if all three of us are given access to affordable bicycles (and no other options), two of us won’t be as happy as the third.

Back to the big picture. Since we are now offering a permanent and equitable price premium on fair trade coffee, we are likely in a good position to add a dividend payout requirement to our terms of trade. We could set a minimum payout ratio of say 20%. We could also allow co-op members to temporarily park that 20% in a “reserve account” is a super-majority believes there is a need, like a temporary capital shortfall or to provide collateral for a loan. Since prices aren’t always high nor harvests always good, it might also be prudent to require that 20% of earnings be used to fund a capital reserve account, so that the co-op will never need to ask members to freeze their dividends. The remaining 60% can be reinvested in the co-op or paid out in the form of higher dividends as the situation warrants and the members decide. The producers have funds for reinvestment and the workers have funds to act on their personal priorities and dreams. A similar formula (different mechanisms) could work for non co-op farms as well.

So, to recap. One: grade all coffee. Two: price all fair trade coffee at a premium to corresponding equivalent grade non-fair trade coffee prices. Three: require fair trade certified producers to pay cash dividends to workers and not just reinvest earnings in assets or provide a return to owners. And there you have it, an elegant pro-market, pro-consumer, pro-planet solution to the fair trade coffee problem.

 What do you think? Am I missing a piece of the puzzle or just thinking outside of the box? Let me know how you would tackle the “fair trade coffee problem”!