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Friday, January 21, 2022
Fair Trade: Without new buyers Fair Trade could be at risk


Fair Trade: Without new buyers Fair Trade could be at risk

Many daily coffee drinkers are aware of coffee-producing practices deemed ""unfair"" because of human rights violations in the industry.

Enter Fair Trade USA, a new business model oriented toward combating this issue by incorporating good working conditions and high production standards. However, even as international demand for Fair Trade coffee continues to grow, its business model may not be feasible in the long run.


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How Fair Trade works

According to the company's website, Fair Trade USA formed in 1998 and seeks to increase the payments to producers of agricultural products, in addition to improving their working conditions.

The nonprofit organization acts as an intermediary between farmers and distributors. In what is, theoretically, a mutually beneficial arrangement, Fair Trade guarantees farmers higher working standards while distributors sell their products at the higher price associated with the Fair Trade label.

UW-Madison Professor of Agriculture and Applied Economics Brad Barham has studied small-scale agriculture in Central and South America for over 25 years. According to Barham, the process begins with the individual coffee farmers, most of whom own small family farms.

Between 10 and 1,000 farms join a coffee-producing co-op that sells their products around the world to buyers such as Fair Trade USA.

The organization offers a premium price for co-ops, but with certain requirements. To sell its coffee to Fair Trade USA, a co-op must pass Fair Trade's inspection for working conditions and certain production process standards.

On the demand end of this market are cafés and coffee distributors worldwide that sell coffee with the Fair Trade label. Sales from the distributors and cafés allow Fair Trade to pay the co-ops, which in turn pay the individual farmers.


A successful business with a challenging mission

Just over 12 years after it began, Fair Trade USA's Annual Reports signal financial success. The organization's revenues have increased, with a large part of that funding coming from donations.

In 2002, the organization brought in just over $1.1 million, including $465,843 in grants and donations, according to that year's annual report. Maintaining consistent growth since then, Fair Trade USA generated over $9 million in 2008, including over $3 million in grants and donations from its supporters. Whole Foods Market, Tiffany & Co. Foundation and Levi Strauss Foundation are among those recorded as having donated $25,000 or more.

But while the company has prospered financially, whether or not it has accomplished its mission is debatable.

The coffee market, like any other, is a bet. The producers, distributors and retailers spend time and money to harvest and supply coffee assuming that someone will buy it. Seeing unfairness in the producer-side of the market, Fair Trade changed the rules.

However, the organization has not yet accomplished its goal, as the demand for its products still falls short of its supply.

The amount of compensation the farmers receive from Fair Trade depends on how much coffee their co-op sells to Fair Trade. And according to Barham, there is a serious problem of oversupply of Fair Trade coffee.

""Let's suppose you're a co-op and 20 percent of your coffee you are able to sell through Fair Trade channels. The other 80 percent you're selling through regular channels,"" he said. ""That's really quite common, especially in the larger co-ops.""

As demand for Fair Trade coffee fluctuates, so must Fair Trade's buying price for co-ops. When the company's offering price becomes lower than that of regular channels like Folgers, Barham said co-ops have no incentive to sell their coffee through Fair Trade.

The simplest solution to a problem of oversupply is, of course, to increase demand. Starbucks has made a huge effort towards this end.

In the past 15 years, Starbucks has seen its revenues increase twenty-fold. The company's recorded revenues rose from $465 million in 1995 to $9.8 billion in 2009, according to the Starbucks website. In fact, even the company's year-on-year marginal revenue has increased.

Starbucks has been a major partner of Fair Trade USA since the organization's founding in 1998, and said in an e-mail that it is the world's largest purchaser of Fair Trade coffee.

""In 2008 we publicly shared another specific coffee purchasing goal: To double purchases of sold Fair Trade Certified coffee in 2009,"" Starbucks said in an e-mail. ""Last year we hit this target, with purchases increasing from 19 million pounds in 2008 to 39 million pounds in 2009. By the end of 2009, 100 percent of the espresso coffee sold in our stores in the U.K. and Ireland was Fair Trade certified.""

The Fair Trade–Starbucks partnership has challenged the assumption that low prices take precedence in consumer choice and instead demonstrated consumer preferences deeper than saving money on a cup of coffee.


""I also fear that it can kind of lull people to sleep""

However, Fair Trade's most important impact, according to Barham, is on awareness.

According to Barham, a major benefit of Fair Trade is that it mainstreams their message: There is a human rights problem in the coffee industry. However, some negative effects persist.

""I also fear that it can kind of lull people to sleep. Like, if I just buy some Fair Trade coffee and Fair Trade chocolate, I did my job for the day,"" he said.

As far as Fair Trade's role in a broader context, it is ""a small, very small, piece of the pie in terms of what we need to think about if we're concerned about improving the wellbeing of people around us and people with less opportunities than we have,"" Barham said.

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