Kerux: a portfolio of Calvin Theological Seminary - Volume 41.3 - 13 October 2006

Fair trade coffee brews a harmful cup

by Chad Vandervalk, Contributing Editor

There has been a recent push within the Christian community to interfere with the natural workings of the market, urging people to purchase "fair trade" goods. Last year, for example, there was an effort to get fair trade coffee purchased for the Student Center at the seminary.

Fair trade is defined by Anil Hira and Jared Ferrie in the 2006 edition of the Journal for Business Ethics as "a movement establishing alternative trading organizations to ensure minimal returns, safe working conditions, and environmentally sustainable production." The method by which fair trade achieves these goals, however, helps a few at the expense of many. The fair trade movement is a way for wealthy westerners to ease their consciences and help a few localised individuals or families in the poorer areas of the world. As I will show, that help causes more problems than it solves, and overall, fair trade coffee is a bad economic and development idea.

As a farmer from the plains of Alberta, I have an extreme aversion to any kind of agricultural market tampering by any outside agency; one might call these right-wing economic tendencies. On the other hand, I also attended the London School of Economics, a school with a reputation for left-wing economic tendencies that counts about its alumni such notable figures as Pierre Trudeau and John F. Kennedy.

In the article "Social or Capital" in the Oct. 6 edition of Kerux on the Sider/Sirico discussion, I agreed with Robert Sirico, president of the Acton Institute, that unregulated or free markets are the most efficient at allocating scarce resources. A market that allows its prices to fluctuate freely ensures that the things demanded are the things produced.

When we look at "fair trade coffee," the first thing to realise is that the coffee marked is complicated, both in its production and its consumption. Coffee can only be grown in certain climates and at certain elevations; because of this, coffee production is done in mostly poorer and less developed nations. At the same time, the worldwide demand for coffee remains fairly constant, regardless of price.

The demand for coffee is very inelastic, which leads to highly erratic coffee prices. As coffee supplies fluctuate with weather conditions, the price of coffee can vary wildly. Production in a good year can be ten times as high as that in a poor year, but since demand does not increase much as prices fall, a good crop year for coffee growers causes a sharp drop in the price as the market clears out the extra supply.

In an article entitled, "The future of Fair Trade coffee: dilemmas facing Latin America's small-scale producers" in the April 2006 issue of Development in Practice, writers Douglas Murray, Laura Reynolds, and Peter Taylor note that "world coffee prices languish at an almost 100-year low due to deregulation-driven overproduction and cost-cutting technological innovations in coffee processing." This 100-year low for coffee prices has dealt a devastating blow to communities that rely on the production of coffee, and has in turn raised much awareness regarding their plight. That awareness has, quite naturally, lead many people in wealthy parts of the world to want to do something to effect chance. This has lead some people to mistakenly place the blame for low coffee prices on the trade practices of the market; in response to this, some people have begun urging that some sort of fair trade system be used in place of the current free trade system.

The goals of fair trade are laudable, and I whole-heartedly agree with those goals. I will concede that coffee co-operatives associated with fair trade have been able to better the circumstances of the growers that participate in them. In an article entitled "Fair-trade coffee in Nicaragua and Tanzania: a comparison" in the August 2006 issue of Development in Practice, writers Gautier Pirotte, Geoffrey Pleyers, and Marc Poncelet argue that "although the volume of fair trade exports remains rather limited, it is important to the small producers involved, partly softening the effects of the crisis by maintaining and supporting the continuation of some economic activity in areas devastated by the fall in coffee prices. In this way fair trade indirectly benefits the whole rural community, as the profits are re-invested in the local economy."

It is good that small communities are helped and that their economy is boosted, but fair trade coffee is not the best way to achieve this success. The system of fair trade places too many restrictions on the market system, which interferes with price signals and can cause overproduction of coffee.

Another problems is that the fair trade movement dictates the structure of the farms that it is willing to help. In an article entitled "Evaluating fair trade consumption: politics, defetishization, and producer participation," writer Sarah Lyon outlines three requirements that coffee producers must meet to be involved in the fair trade system: "First, they must be small family farmers. Second, they must be organised into independent, democratic associations. And, third, they must pursue recently elaborated ecological goals."

The romanticised view of the family farm in the first world is played out in the fair trade system by its favoring these types of farms. This love affair can be seen in the United States and Europe, where the government spends millions of dollars protecting their own family farms at the expense of those of the rest of the world.

Comparing the origin of income that a farmer receives at the farm can be shocking; roughly 60% of the average income of a farmer in Europe is from direct government intervention. In the United States, that number is a little under 40%, and in Canada it is less than 20%. How can a farmer in Canada compete with a farmer in Europe or the United States when they are already 20-40% behind? How can a farmer in Brazil compete?

This desire to protect the family farm has caused worldwide overproduction of many agricultural goods, and that same desire is now being extended into coffee production. But the desire to protect the family farm is not helping out the poorest people in the coffee industry. Hira and Ferrie point out in their article that "most coffee is grown on large estates, filled with landless workers who are much worse off than small landowners."

In the large scheme of things, fair trade production makes things worse. The market uses price signals to indicate the most efficient allocation of resources. If there is too much of something being produced, too many scarce resources are being allocated to a certain commodity. This will cause the price of that good to go down, decreasing the incentive to produce that commodity. This continues until a balance is reached. When markets are interfered with, the price signals do not reach the producer, and goods are produced which no one wants to buy.

The price for coffee is so low because there is an oversupply. The market is trying to tell people to stop placing their resources in producing a commodity for which the demand is insufficient. But fair trade guarantees a base price for coffee, which in turn encourages people to continue to produce the commodity. The increased production and marketing of fair trade coffee will increase the supply of coffee on the market and decrease the demand for conventional coffee even farther, causing prices to fall even further.

But this may not sound too bad yet; so what if more coffee is produced and larger farms get a lower price for their good? Since most coffee is produced on large landholdings that employ large numbers of extremely poor landless people, the further decrease in price will cause these landowners to lay off more of their extremely poor workers, worsening the crisis.

Pirotte, Pleyers, and Poncelet note that when fair trade was focused on small-scale producers in Nicarague, it failed to reach the poorest sector of the population: the unemployed coffee-plantation workers, who were laid off en masse by large plantation owners following a decline in the price of coffee. The writers also note that the fair trade movement does not help these seasonal landless workers. "Even when they are working for fair-trade producers, their income and working conditions have not improved, despite the principles underpinning fair trade."

So the fair trade system, which helps a few family-sized farms, actually harms the poorest portions of the people within the coffee industry.

Why, then, is there such an attraction to fair trade? Lyon notes that an increasing number of scholars describe fair trade as "a system that emphasises mono-cultural production for export in which third world producers serve the purposes of first world luxury consumption." Essentially, purchasing of fair trade coffee does more to ease the conscience of the buyer than it does to ease the condition of the poorest workers in coffee production.

Even so, we shouldn't conclude that there is nothing that can be done to make the coffee industry more beneficial for the poor people who work in it. One thing that could be done would be to help poorer coffee farmers band together in some form (co-operatives, partnerships, etc.) and develop further processing facilities. There is a market within the first world for luxury goods and the importation of good quality coffee that has not been fully realized. Assisting farmers to process more of their own product will allow them to recapture more of the gains of production, which provides a way for the producer to receive a larger amount of the final retail price, without propping it up in an artificial manner.

Another, and perhaps better, way to solve the coffee industry problem is to help coffee farmers diversify their operations. Many of these areas are in a crisis because they rely solely on the coffee industry for their livelihood. Encouraging and assisting these people to obtain training and or materials for other industries would have a much richer and more lasting impact on these communities.

Even though the fair trade system has had a positive impact in some localised areas and for a few individual families, it is a poor way to achieve the development and advancement of the people involved in the coffee industry. Not only does it not help the poorest people in the industry, it could actually cause further harm to them. In the coffee industry, fair trade is anything but.