[S4:E6] Articles Read: Why Fair Trade Has Failed Coffee Producers

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I wrote the original article in 2014, discussing how Fair Trade has failed to significantly improve farmers’ livelihoods. The article presents one possible solution. This audio contains supplemental information not in the original article.


The original article is titled Why Fair Trade Has Failed Coffee Producers

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This article is titled "Why Fair Trade Has Failed Coffee Producers" and I wrote it in December of 2014.

I opened the article with a quote from the book titled Coffee: terroirs and qualities, which was written in 2006. That quote is "The quality of a product is defined by economist as being the set of the product’s characteristics or attributes that a buyer seeks to acquire during a transaction."

I included that quote at the beginning of the article to ground the discussion in quality. Because that’s where I believe that fair trade has failed coffee producers.

Now we start the article. There’ve been several criticisms of fair trade’s ability to get more money into the hands of coffee farmers. The Wikipedia article titled "Fair trade debate" documents some of them. What I want to focus on in this article is the implications of the decision to not tie coffee quality directly to farmers’ compensation.

By simply compensating farmers for being one small and two members of a democratically administered co-op the movement failed to add value to the final product itself; the coffee in customers’ cups. The result is that participation in fair trade alone is not enough to significantly improve a farmer’s livelihood. And it creates a perverse incentive to offload lower quality coffee to the fair trade program while selling higher quality coffee to conventional markets.

As I mentioned in the post "Ethical Consumption," price, quality, convenience, and brand-familiarity are often the most important factors affecting a decision to buy a given product. Fair trade certified coffee addresses none of those factors. In fact, the way it’s designed it, inadvertently encourages farmers, given the right circumstances, to sell their lowest quality coffee as certified fair trade while selling the higher quality coffee at a premium beyond what fair trade pays. Here’s an example of how from Colleen Haight quote:

" A farmer has two bags of coffee to sell, and there’s a fair trade buyer for only one bag. The farmer knows bag A would be worth $1.70 per pound on the open market because the quality is high. And bag B would be worth only $1.20 because the quality is lower. Which should he sell as fair trade coffee for the guaranteed price of $1.40? If he sells bag A as fair trade he earns $1.40, the fair trade price, and sells bag B for $1.20, the market price equaling $2.60 a pound. If he sells bag B as fair trade coffee, he earns $1.40 and sells bag A at the market price for $1.70, he earns a total of $3.10 a pound. To maximize his income, therefore he will choose to sell his lower quality coffee as fair trade coffee. Also if the farmer knows that his lower quality coffee beans can be sold $1.40 per pound, provided there is demand, he may decide to increase his income by reallocating his resources to boost the quality of some beans over others. For example, he might stop fertilizing one group of plants and concentrate on improving the quality of others. Thus the chances increase that the fair trade coffee will be of consistently lower quality. This problem is accentuated when the price of coffee rises to 30 year highs as it has done recently."

That was written by Coleen Haight in 2011 in the article titled "The problem with fair trade coffee." it was published in the Stanford Social Innovation Review.

One method of fixing this problem is to explicitly pin the price of fair trade certified coffee to the coffee’s quality. In this scenario, if the coffee doesn’t meet a baseline quality level, it can not qualify for fair trade prices. At the end of the day, coffee is a product meant for consumption. It is an unfortunate fact that bad tasting coffee has less market value than great tasting coffee, regardless of any cultural or social importance that may exist in the production process.

Empowering farmers with the knowledge and skills to improve the quality of their coffee will not only help improve the marketability of the product. But it will also set them up for future success. The ‘teach a man to fish’ allusion, if you will. One of my earliest coffee projects was based on this principle.

In that project, I bootstrapped a small business with an interest-free microloan and worked with the mail to improve operations, to improve product quality. My goal was projects like that one is to help the farmers invest in knowledge, processes, techniques, and equipment with an eye on quality-improvement across all quality tiers. Not just the special, cream-of-the-crop, microlots. Improving the quality of all coffee will increase its marketability and hopefully hopefully increase its value in an appreciable manner.

I believe this is much better than paying producers extra for simply being small and members of a co-op.

This post is part of a series. Other titles in the series include "Ethical Consumption," "Fair Trade Coffee," Ethical Trade," and "Organic Coffee."

That was me reading my article titled "Why Fair Trade Has Failed Coffee Producers" written in 2014. When I read articles like this, especially older articles, I like to add updated information when I can. Since this article was written, I’ve developed a concept I call the central dogma of coffee. I use the central dogma of coffee to make sense of the coffee industry.

Let me try to explain it more.

Cotton farmers don’t sell t-shirts and coffee farmers don’t sell coffee.

The central dogma of coffee breaks down the supply chain into its three simplest production phases. First a raw material ,then an intermediate product, and then a consumable product. It’s the same as saying that coffee goes from a farm to a mill, to a roastery. We have to have all three to have coffee.

We also have to have all three in that order. The central dogma is unidirectional. It is also irreversible you can’t take roasted coffee and turn it into green, unroasted coffee. And you can’t take green un-roasted coffee and turn it into a cherry. So the central dogma is a set of cascading dependencies that define the global coffee industry.

The market phases of the global coffee industry are very closely linked to the product phases. For example, you have a market for cherries produced at the farm. You have a separate market for the unroasted coffee beans produced at the mill. And finally you have a third market for the roasted beans produced at the roastery.

The supply chain that combines those three markets is a series of discreet one-off transactions. Buyers of roasted coffee, don’t participate in the market for cherries. They can’t mill them. Cherries are completely separate product from unroasted green coffee. Which is of course a separate product from roasted coffee.

Thinking that the money flows from the consumer to the producer is misleading. Thinking about each phase as an individual transaction in which a business seeks to buy a product, add value to it, and then sell it for a profit, is to me, a more accurate and helpful, helpful way to think about it.

Thinking about the global coffee industry in context of the central dogma, we can see that ultimately the money that a farmer receives from hit for his or her cherries is independent of the price a cafe receives for a latte. The market works in the opposite direction. The price of the latte depends in part on the price of the roasted coffee, which depends on the price of the unroasted green coffee, which depends on the price of the cherry. Therefore to manipulate the price a farmer receives for cherries our most effective and direct solution is to work with the farming business to improve operations in a way that increases its ability to sell its product for a profit.

The ways to do this directly include developing and or improving skills in accounting, understanding how to generate a P and L statement, how to differentiate and account for fixed versus variable costs, how to market a product effectively, so on and so forth.

The most successful companies at this, the companies that often get a bad rep, like the Starbucks and the Nestle’s of the world, they do this. They focus first and foremost on the business fundamentals. And if the small holder farmers want to play in that market. They need to do the same. And I want them to be able to play in that market. Better yet thrive in that market. And that’s why I personally prefer schemes that aim to improve their ability to do so.

All of my training and the training I provide has been and still is geared towards that goal. For example, training roasters to better understand the fundamental physical and chemical processes taking place when they are roasting a coffee. Or training processors the physical and chemical processes taking place when they are processing cherries. The same goes for participating in a market selling coffee. You have to focus on the business fundamentals.

This is Michael with Oil Slick Coffee and this was a read of my article titled "Why Fair Trade Has Failed Coffee Producers." it includes supplemental information developed since the article was originally written. Thank you for listening.