Is Fair Trade Fair?

by Russ Roberts on March 19, 2006

in Trade

The "fair trade" label on coffee and other products purports to help poor farmers get more for their products by cutting out the middleman. Yet, it doesn’t always work that way as the New York Times reports in this story:

TIM TERMAN always looks for the black and white certified Fair Trade
logo when he buys bags of coffee from the Mountain People’s Co-op in
Morgantown, W. Va. He pays nearly twice as much — up to $10 a pound —
as he would for conventional coffee, hoping the extra dollars go to
struggling farmers.

That’s not always the case. Despite
good intentions, most consumers who shop according to their social
convictions don’t know how much of their money makes it to the people
they hope to help. Critics say too many fair trade dollars wind up in
the pockets of retailers and middlemen, including nonprofit
organizations.

But organizations involved in fair trade say the benefits do trickle
down. Paul Rice, chief executive of TransFair USA, which controls Fair
Trade certification in the United States, said the programs sometimes
eliminate as many as five middlemen — a local buyer, miller, exporter,
shipper and importer — and instead allow farmers to deal directly with
an American wholesaler. "It is empowering farmers to create a powerful
export business," he said. "When they do that, they can make
dramatically higher prices, often two to three times higher."

If
consumers pay a premium for those products, Mr. Rice said, it means the
concept is working. "They put their money where their mouth is and pay
a little more."

 
   

That’s an interesting measure of whether the concept is "working."   If consumers pay more, it’s working because their consciences are being salved. Mr. Rice seems to think it doesn’t really matter if farmers get any of the benefits of the higher prices.

TransFair describes its logo fees as amounting to just pennies on
the pound. The pennies add up. Last year, it generated $1.89 million in
licensing fees from companies that used the logo. It also spent $1.7
million on salaries, travel, conferences and publications for the
40-employee organization.

Some critics find such expenses
excessive. "Farmers often receive very little," said Lawrence Solomon,
managing director of the Energy Probe Research Foundation, a Canadian
firm that analyzes trade and consumer issues. "Often fair trade is sold
at a premium, but the entire premium goes to the middlemen."

Lovely, isn’t it? The fair trade organization replaces traditional middlemen with itself. The results don’t seem to be all that different:

Fair Trade labels don’t list the amount paid to farmers; that sum
requires research. The amount can vary depending on the commodity. An
analysis using information from TransFair shows that cocoa farmers get
3 cents of the $3.49 spent on a 3.5-ounce chocolate bar labeled
"organic fair trade" sold at Target. Farmers receive 24 cents for a one-pound bag of fair trade sugar sold at Whole Foods for $3.79.

The
coffee farmer who produced the one-pound bag of coffee purchased by Mr.
Terman received $1.26, higher than the commodity rate of $1.10. But
whether Mr. Terman paid $10 or $6 for that fair trade coffee, the
farmer gets the same $1.26.

More bad news:

Fair Trade labels don’t list the amount paid to farmers; that sum
requires research. The amount can vary depending on the commodity. An
analysis using information from TransFair shows that cocoa farmers get
3 cents of the $3.49 spent on a 3.5-ounce chocolate bar labeled
"organic fair trade" sold at Target. Farmers receive 24 cents for a one-pound bag of fair trade sugar sold at Whole Foods for $3.79.

The
coffee farmer who produced the one-pound bag of coffee purchased by Mr.
Terman received $1.26, higher than the commodity rate of $1.10. But
whether Mr. Terman paid $10 or $6 for that fair trade coffee, the
farmer gets the same $1.26.

At the heart of the fair trade idea is that small farmers are at the mercy of the marketplace:

SHOPPING activism in the United States has helped funnel $67 million to
fair trade farmers and farm workers throughout Latin America, Africa
and Asia since 1999, according to TransFair. Without fair trade,
supporters say, some farmers have no access to market information and
can often be duped into selling to middlemen at below-market prices or,
if prices fall, can be forced to quit farming.

The story seems to suggest that even with ‘fair trade,’ farmers can be duped. But the real question is whether international organizations such as Fairtrade can intervene in these markets without unintended consequences. The real solution to make poor people’s lives better is to buy a lot of their products. Low prices for consumers are the route to improving these people’s lives by increasing the demand for their products.

If ‘fair trade’ organizations really want to help poor farmers from being duped, maybe they’d do them a better turn by helping them get information about market prices and new innovations that could lower their costs. That would help farmers without raising prices to consumers, be intellectually honest and might actually make farmers’ lives better.

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{ 24 comments }

Slocum March 19, 2006 at 4:41 pm

An even more compelling takedown of 'fair trade':

http://www.reason.com/0603/fe.kh.absolution.shtml

The 'Fair Trade' organization dictates that only a very specific sort of small-farmer collective is eligible to be certified:

"The FLO defines a fair farm as a family farm that is a part of a large democratic cooperative. Farms cannot be “structurally dependent on hired labor,” which means that hiring even one laborer year-round makes a farm ineligible for certification. Even more controversial is the cooperative requirement. Rather than deal with individual farms, the FLO exclusively certifies large cooperatives composed of hundreds of small land-owning farmers, each with a single vote on how to best spend the Fair Trade profits."

"The organization charges between $2,000 and $4,000 to check out a cooperative, plus annual recertification fees and a small percentage of the price of each pound of coffee."

In other words, only coffee farmed according to collectivist 'Dennis the Peasant' rules of production are eligible.

Fair trade coffee for me? No way.

JohnDewey March 19, 2006 at 6:34 pm

Did I understand the math here? For every $6.00 pound of coffee sold, the coffee farmer gets $1.10. For every $10.00 pound of fair trade coffee sold, the coffee farmer gets $1.26. I think a U.S. coffee consumer would help "poor" farmers more if he:

- buys an extra pound of $6.00 coffee every other shopping trip;
- throws that extra pound in the garbage or gives it to a homeless shelter; and
- sends the $2.00 savings to the George Mason University Department of Economics Christmas Party fund.

If guilty U.S. liberal goofballs want to help those farmers, they should just buy more coffee. Of course that would drive up prices for us non-guilty consumers, so I hope they continue their little silliness.

Kevin March 19, 2006 at 9:35 pm

"…the programs sometimes eliminate as many as five middlemen — a local buyer, miller, exporter, shipper and importer — and instead allow farmers to deal directly with an American wholesaler."

I feel sorry for all these middlemen that are out of a job. Don't these Fair Trade types care about what they are doing to the them? Anyone interested in starting a group to help all of the middlemen driven out of business by Fair Trade?

Other Kevin March 20, 2006 at 1:15 am

Ha, if they were cutting out the middle man coffee ought to be cheaper, not $4 a bag more expensive. If stupid yuppies want to salve their white guilt they can just hand me the extra $4 and I'll slap them real good. That should help.

Meanwhile, Starbucks shops are so busy being a frenzy of "fair trade" signage that they don't care their brewed coffee sucks anus. Lousy, bitter robusta rat droppings. Coffee at Mickey Ds is a million times better. Actually pretty darn good.

I'm going to write a novel about Paco the middleman and his starving child and dying wife, all getting screwed by the white devil and his "fair trade" boondogles.

P.S. I recommend Contracafe.com. If you need to support something, support a former anti-commie freedom fighter!

http://amateureconblog.blogspot.com/ March 20, 2006 at 6:47 am

Great post, thanks.

Jaroslav Borovicka March 20, 2006 at 8:39 am

The big problem with the farmer-middleman relationship is the incredible asymmetry, both in information and market power. Although we have a world market for agricultural products, the small farmers in the underdeveloped countries mostly do not participate. They are stuck in their local market where there is a single middleman who can drive down the price for the farmers' perishable harvest to almost any level, knowing that the farmers have no other option. They have neither the knowledge nor the capital nor the volume to bring their harvest to the `world' market, and the middleman possesses extreme power to drive away any other people who would try to act as middlemen and create some competition.

Steven M. Warshawsky March 20, 2006 at 10:38 am

Heck, I'm amazed that the New York Times would publish a story that was even remotely skeptical of the bona fides of a liberal economic position.

Half Sigma March 20, 2006 at 11:24 am

The actual cost of the stuff you buy is mostly marketing costs and not the actual costs of the raw materials and manufacturing. This is especially true for food. And doubly true for upscale food.

Half Sigma March 20, 2006 at 11:31 am

And my above comment explains why a lot of economists just don't get the modern economy, because it's not based on what seems rational to economists.

People wouldn't pay $10 for a bag of coffe which only costs $2 (assuming it costs 75 cents to roast it and bag it on top of the $1.25 to buy the beans from the farmers) if they were rational.

Noah Yetter March 20, 2006 at 12:31 pm

"And my above comment explains why a lot of economists just don't get the modern economy, because it's not based on what seems rational to economists.

People wouldn't pay $10 for a bag of coffe which only costs $2 (assuming it costs 75 cents to roast it and bag it on top of the $1.25 to buy the beans from the farmers) if they were rational."

Utter nonsense. Economists are the only ones who consistently understand that prices can have little if anything to do with costs of production.

Also "rational" is a technical term in economics with a different definition than you will find in the dictionary. Check out an economics textbook sometime, you might learn something.

H. Adams March 20, 2006 at 12:48 pm

Actually, every undergraduate macroeconomics text defines the final of a good as the value added during each of the production. So, you're wrong.

H. Adams March 20, 2006 at 12:49 pm

Sorry, my last comment should read "final price of a gooa as the value during each of the production cycles…"

cb March 20, 2006 at 1:16 pm

Other Kevin, first time I laughed all day, thanks.

John Dewey March 20, 2006 at 4:08 pm

"Actually, every undergraduate macroeconomics text defines the final of a good as the value added during each of the production. So, you're wrong."

Who is wrong, Mr. Adams? It's been 25 years since my last microeconomics course, so I may not be up to date. I thought microeconomics texts say that, in the long run, price should equal cost of production. That would include, I believe, some return on invested capital. But in the short run, price will be determined by supply and demand, and will be independent of cost. I haven't heard an economist define long term, but I think the term can be so long that the short run definition is all that matters for many goods.

rmark March 20, 2006 at 4:41 pm

I don't drink coffee.

H. Adams March 20, 2006 at 5:24 pm

Yes, the equilibrium price of a good is determined by supply and demand. However, there are factors that determine how supply and demand vary with price, and one of these factors is the cost of production.

Let's take a steak dinner. Obviously, you could go to your local grocery store and buy a ribeye & pay $4.00/lb. However, you could also go to your local steakhouse and pay $6.00/lb for the same ribeye. So, why are they different? Well, as the consumer you are willing to pay more for the steak when someone else has produced it. So, you could say your demand curve has changed with the extra production that went into that steak dinner.

And if you don't like that explanation, as you know, in every exchange(due to the the circular flow of money, every cent of expenditure must equal every cent of income). When you pay the $4.00 for that steak at the grocery store it is obviously not the same as what the grocery paid to the butcher. You are essentially adjusting your demand curve to reflect the fact that the grocery store shipped the steak to your town (from the butcher) and wrapped it up. That additional you are willing to pay for this service is the value added for that stage of production. And because every expenditure must mean income for someone else the sum of the value added for each stage of production must equal the price of that good (in a strict mathematical sense of course)even though that price is sold on a market and subject to the laws of supply and demand.

John Pertz March 20, 2006 at 6:15 pm

Tim Harford gives a brilliant analysis of the fair trade label in "The Undercover Economist". He brings up the topic of scarcity and asks why is coffee so damn cheap in the first place. A lot of that has to do with the fact that so many third world farmers are choosing to grow coffee instead of doing other things. The abudance of 3rd world growers is mostly a reflection of first world agricultural trade policy than anyting else that is ruining the lives of poor farmers.

johnny bonk March 20, 2006 at 7:03 pm

Fair trade, c***s trade. Like yeah, really sensible during a period of oversupply to offer a premium. Sort of like putting out a fire by throwing petrol (gasoline) on it.

If I heard the fairtraders talking sense – say using the ethical premium they have obtained to pay farmers to cut down coffee trees, then I might take them more seriously.

I suspect, though cannot prove, that the biggest beneficiaries of UK financed fairtrade are white, middle class, female, young and pretty and that they work out of lovely offices in beautiful old houses in the countryside around Oxford.

johnny bonk March 20, 2006 at 7:06 pm

"The abudance of 3rd world growers is mostly a reflection of first world agricultural trade policy …."

Their high population growth might also be contributing to the "abundance" of growers.

mikegiberson March 20, 2006 at 10:30 pm

In blog posts at Knowledge Problem, I've suggested reasons to think the premiums paid for quality coffee are more sustainable than the premiums for fair trade coffee. See the most recent post here: http://www.knowledgeproblem.com/archives/001552.html .

Half Sigma March 21, 2006 at 9:43 am

"Obviously, you could go to your local grocery store and buy a ribeye & pay $4.00/lb. However, you could also go to your local steakhouse and pay $6.00/lb for the same ribeye."

There's a restaurant somewhere that sells a one pound steak for only $6?

Cornelius van Vorst March 21, 2006 at 9:55 am

"Actually, every undergraduate macroeconomics text defines the final of a good as the value added during each of the production. So, you're wrong."

Actually, you're just misapplying the mechanism for tabulating GDP. The values of factors of production are imputed backwards from the value of the first-order goods they produce.

I also note your reliance on macroeconomic nonsense versus the microeconomics being discussed here. You'd do well to avoid that.

Monyet Miskin March 23, 2006 at 4:40 am

Where are these markets where the middlemen control the prices? I've just come back from a trip to Central Java, where there are a lot of sugar farmers (don't ask me why they aren't growing coffee!). I can assure you that those farmers know how much their sugar is worth and are currently enjoying the benefits of the recent price increases.
Maybe the markets are less open in the Americas?

bilal May 1, 2006 at 3:49 pm

I'am researching on this topic for days but i didn't see so many people that think fair trade is a piece of nonsense.I think, this means these people don't want the farmers to earn what they deserve. am i wrong?

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