Business & Economics CAROUSEL

January 29, 2010

What’s In a Label?

The real meaning of the fair trade label on your gourmet coffee.

By Elisabeth Best

You’ve probably seen a “fair trade coffee” sign in the window of your favorite gourmet coffee shop, but what exactly does fair trade mean — beyond a $4 cup of coffee, that is?

Although it doesn’t have a universally accepted definition, fair trade is generally understood to be a movement that promotes sustainability in developing countries and tries to pay “fair” prices to the local producers exporting from them — most notably farmers raising coffee, bananas and tea.

The reasoning behind this is that small-scale farmers in developing nations cannot compete with industrial farmers, whose mechanization, large landholdings and chemical use — sometimes accompanied by low wages — achieve high yields cheaply. Plus, small farmers do not receive subsidies to protect them when prices drop for their commodities — and their products often face import tariffs that further decrease their competitiveness.

As global coffee production has increased, the market price of coffee has fallen. This lower cost has been absorbed by coffee producers, many of whom are small-scale farmers in poor countries. And yet retailers selling these beans or brew in the developed world often charge consumers higher-than-market prices. The fair trade movement seeks to connect producers to consumers, cutting out or at least containing the middlemen so that farmers receive a better price.

But as Mara Fridell, Ian Hudson and Mark Hudson explain in their recent article “With Friends Like These: The Corporate Response to Fair Trade Coffee,” you can’t taste or feel fair trade. “Essentially, fair trade asks consumers to pay a premium based on the quality of the production process — on the consequences of production for workers and for nature. No information about this process can be derived from the experience of consuming the product, nor can it be discerned by eyeballing, weighing, or squeezing prior to purchase, as one would test the quality of a cantaloupe.”

Fair trade coffee has been widely celebrated as giving coffee farmers around the world access to a living wage, credit at fair prices and international markets. It has also been less widely appreciated for making environmentally friendly coffee production profitable. Advocates of the movement say it has been “one of the most powerful responses to the plight of producers in developing countries who are being excluded from the benefits of international trade.”

In spite of the social gains the fair trade movement has achieved, it is not without its opponents. Some argue that the movement excludes small-scale farmers who do not wish to join cooperatives; others oppose it on the grounds that it sustains an essentially unsustainable activity.

But even though fair trade policies have made it possible for many farmers — an estimated 800,000 — to compete in the global market, they have not been the panacea that many had hoped.

A recent report by Bradley Wilson, an assistant professor of geography at West Virginia University, explores the plight of Nicaraguan coffee farmers who are unable to overcome a legacy of indebtedness despite participating in fair trade cooperatives. The study appears in the latest issue of the journal Geoforum.

Approximately 25 million people worldwide depend on coffee production for their livelihoods. But the expansion of coffee production in Vietnam and Brazil at the turn of the century led to a rapid decline in price on the world market, with devastating effects on the subsistence farmers for whom alternative crops were not an option.

When coffee prices dropped to 30-year lows in 2001 (from $1.20 per pound to around $.50 per pound), Nicaragua experienced arguably the worst effects of the “coffee crisis.” In 2000, the nation’s coffee exports earned it $171 million, 26 percent of its export revenues. A year later its coffee exports had been cut in half.

What followed was a sort of “subprime crisis for coffee beans”: Banks foreclosed on an estimated 500 to 3,000 coffee farms and virtually froze lending to the sector, cutting it by 80 percent between 1999 and 2001. Three private banks financing coffee production, sitting on $100 million in outstanding loans, declared bankruptcy. Rampant unemployment ensued.

The Nicaraguan government intervened in debt restructuring to benefit large producers late in 2001, but did little to help the little guys, the peasant farmers and coffee workers who bore the brunt of the crisis.

Contracts for fair trade-certified coffee from coffee importers in North America and Europe — where prices for lattes failed to replicate the price slide — seemingly saved the day. These contracts helped Nicaraguan farmers generate revenues at more than double the conventional market price and sheltered over 6,000 peasant farmers from the price decline.

While farmers not affiliated with the fair trade movement were forced to sell their property, abandon coffee production or migrate, the others saw their prospects brighten considerably.

The fair trade cooperative that represents farmers in the Fonseca coffee-growing region increased its total exports from 7 million pounds to 70 million pounds between 1997 and 2007, earning the region international recognition. This attracted projects from nongovernmental organizations to increase literacy, decrease child mortality, address women’s health and improve access to drinking water, to name a few. These projects have enhanced the lives of coffee farmers and their families, and the cooperatives have given farmers access to credit and technical assistance.

Wilson spent 12 months working with these farmers. He attended cooperative meetings, conducted interviews, visited the homes and farms of cooperative members and observed the coffee labors carried out over the harvest cycle.

As he points out, “It is difficult to dispute the evidence that fair trade played a vital role in increasing the capacity of fair trade cooperatives to export high-quality coffee and to provide unique social services to their members — services that are otherwise unavailable either from conventional agribusiness or the Nicaraguan state.”

But almost 10 years after the onset of the coffee crisis, many fair trade farmers in Fonseca are burdened with so much structural debt that even a record crop doesn’t mean an escape from poverty. While this situation certainly wasn’t created by fair trade cooperatives, it hasn’t been solved by them either.

For the 77 percent of coffee farmers in Fonseca who own 5 acres in coffee production or less, debt rules. These farmers receive a percentage of the export price paid before processing and a dividend from fair trade premiums. For the many farmers who are indebted to the fair trade cooperative itself, these amounts are not paid out but applied to outstanding debts.

How did these farmers become indebted to the very cooperative designed to help them earn a fair wage?

In order to provide them with year-round access to credit, the cooperative instituted a crop-mortgage system in Fonseca, under which households receive a cash advance contingent on estimated production with an interest rate of 18 percent. To qualify for these loans, farmers provide their land titles as collateral. If farmers do not meet their quotas and fail to pay back their loans, the remaining debt is assessed a 25 percent interest-rate penalty. It’s not quite as bad as the coffee-crisis days: One crucial benefit of the program is that the farms may not be foreclosed upon, and in certain cases, debt has been restructured.

These crop mortgage loans give coffee farmers direct incentives to deliver their coffee and increase their productivity. But the debt obligations make it difficult for them to improve their standard of living, intensify productivity or post higher profits. They have remained dependent on credit to maintain their livelihoods.

“We owe a lot to fair trade,” one Nicaraguan told Wilson. “Without fair trade prices and credit during the crisis, we would have lost everything. But today the farmers here are in debt. We are facing a crisis of the costs of production.”

Wilson stresses, “Although farmers may be staying afloat, the burdens they carry as laborers at the bottom of the coffee chain are heavy to bear. … [We] must remember that fair trade should offer more than a means of basic survival.”

He adds that increasing the price per pound is not enough: the structural constraints to profitability — high costs of production and consumption, low yields and high interest rates — must also be resolved.

If there’s one group that really doesn’t like the fair trade movement, it’s the coffee corporations.

The four major companies that traditionally dominated the coffee market — Sara Lee, Nestlé, Kraft and Procter & Gamble (no longer in the coffee biz) — have argued that coffee farmers suffer from low coffee prices brought on by the overproduction of coffee, which the fair trade movement exacerbates. They assert that the price floor, or minimum price, maintained by fair trade practices prevents high-cost producers from exiting the market, which would drive down supply and thereby raise prices.

Still, coffee corporations have tried to compete with fair trade cooperatives in a way that threatens to discredit the entire movement. By using ethical branding on their own products, these corporations have saturated the feel-good coffee market, with few consumers able to distinguish between fair trade labels.

The Fair Trade Labelling Organization has sought to combat this by developing a fair trade certification mark for the goods that meet its standards. These standards seek a guaranteed minimum price of $1.25 a pound, ensure that a fair trade premium of 20 cents a pound is paid for investment in social services and enable producers to gain access to credit. While Wilson sees this as a good first step, he says it has not guaranteed that farmers can meet the costs of production and obtain a decent standard of living.

Fridell, Hudson and Hudson are unsure whether the certification logo can be effective in light of the recent corporate trend toward ethical labeling. “Fair trade is reliant on conveying this information to consumers through the uniqueness of its logo. The fair trade logo provides a guarantee of a particular production process embodied in the commodity. By washing the market in claims of philanthropic largesse, ethical treatment of producers, labor codes and sustainability-certifying labels, the coffee corporations are undermining the uniqueness of the fair trade label.”

And when companies like Nestlé (routinely excoriated for its business practices in developing countries) can get their coffee certified fair trade — the company’s Partner’s Blend boasts the FLO label — many wonder if the movement can succeed in reforming the industry.

One-time coffee giant Procter & Gamble, whose mass production had been a prime contributor to the plight of small coffee farmers, was also able to get its fair trade coffee certified. Procter & Gamble sold fair trade coffee only under its Millhouse specialty label and has refused to make its more mainstream Folgers beans small-farmer friendly. And, of the 500 million pounds the Millstone and Folgers brands imported annually at the time of its certification, fair trade beans accounted for less than 1 percent. (P&G sold its coffee division to Smuckers in 2008; the Millstone division still notes its fair trade affiliation.)

So before you reach for a bag of feel-good coffee, make sure you’ve done research. As the Fonseca farmers know, not all fair trade labels are created equal.

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