To what extent are small-scale coffee producers in Latin America the primary beneficiaries of Fair Trade?

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By: Larissa Zemke

ABSTRACT

Fair Trade[1] presents an alternative to traditional forms of international aid[2] because the livelihoods of small-scale producers and communities, as well as the economic growth of developing nations, are supported through trade, since they receive a ‘fair’ price from developing nations for the goods they produce. The founders of the fair trade concept, Nico Roozen and Frans van der Hoff, were inspired by the statement of a Mexican coffee farmer: “We are not beggars, we only need a fair price for our coffee […] we want to put an end to the centuries of exploitation that we have experienced […] and [gain] the (market) power to change [our] destiny.”[3] This exploitation may be explained by the dependency theory, which states that the terms of trade between center – developed nations – and the periphery developing nations – is unbalanced and unfair.[4] Immanuel Wallerstein’s Center-periphery model[5], may be applied to analyze this relationship. The underdeveloped Latin American coffee smallholders, the periphery, is exporting the raw material of coffee to the developed, industrialized world, and the market acts as a means by which the core exploits the periphery.[6] Fair Trade aims to mitigate this unfair power relationship through its sustainable initiatives.

In 1981, Dutch foreign-aid activists founded the world’s first Fair Trade cooperative, the Union of Indigenous Communities in the Isthmus Region (UCIRI), with the objective of fighting the root causes of persistent poverty among local coffee farmers. They adopted policies aimed at readjusting low coffee prices and reducing farmers’ heavy debts[7] in order to more aggressively compete in the world market. The founders went on to establish the Max Havelaar label which successfully elevated and stabilized coffee prices in Oaxaca, Mexico by eliminating the “middleman”[8] and shortening the coffee production value chain. Small-scale farmers were able to receive a higher price of $0.95 per kg of coffee, instead what they previously received: $0.25.[9] Certification programs were founded in order to ensure that ideals and standards of Fair Trade are implemented, these later joining under the umbrella group known as the Fair Trade Labeling Organizations International (FLO).[10]

The stakeholders in the Fair Trade coffee network include producer groups in developing nations, umbrella organizations, buyers in developed nations, roasters, retailers, and consumers.[11] The intended primary beneficiaries of the Fair Trade concept are small-scale producers in developing nations. The main issue these producers face is the downward trend of coffee prices in the global market, since there is an extremely high demand for coffee. In the 1900’s, world coffee production increased at an average annual rate of 3.6%, whereas demand experienced a rise of 1.3% per year.[12] As a result, coffee smallholders have been unable to cover their production costs and improve their livelihoods.

fair-trade-farmers-gardenFair Trade International (FLO) states that Fair Trade standards are designed to support the sustainable development of small-scale producers and agricultural workers in the poorest countries in the world.[13] Fair trade’s key objectives include: ensuring that producers receive prices that cover their average costs of sustainable production; providing a Fair Trade premium[14]; investing in social, economic, and environmental development projects; enabling pre-financing for producers; facilitating long-term trading relationships; enhancing producer power over trading process; and setting clear minimum and progressive criteria to ensure that conditions of the production and trade of all Fair trade certified products are socially, economically fair and environmentally responsible.[15]

SMALLHOLDERS & FAIRTRADE

In order to fully evaluate the socio-economic impacts of Fair Trade coffee on small-scale producers, this section uses an ‘asset analysis’ based on four assets or types of capital[17]: social, human, financial, and physical capital.[18]

HUMAN CAPITAL

The analysis on human capital focuses on capacity building which enhances the small-scale coffee producers’ understanding, skills, access to information, knowledge, and technical training in order to enable them to perform effectively so that they may sustain and improve their lives.[19]

The coffee cooperative union in Jinotega, Nicaragua, Soppexcca, provides technical support to small-scale coffee farmers to achieve capacity building through workshops and direct personal assistance which provides an opportunity for them to access the Fair Trade market and obtain a higher price for their coffee, while also ensuring their coffee meets required quality standards.[20] Furthermore, the case study has shown capacity building of the Jinotega smallholders resulted in an increase of their competitiveness on the Fair Trade market.

The development of sustainable and improved livelihoods also includes improvement in human capital related to gender equity and the role of rural women in fair trade activities.[21] Improvements have been shown through the formation of Soppexcca’s “Café de las Mujeres,” which has been encouraging an increase in women’s participation in fair trade coffee production and generating household income.

However, a case study comparing TransFair USA (TF)[22] cooperative participants and non-participating farmers in three Latin American countries on the socioeconomic indicators of well-being revealed education and health outcomes[23] shows varied results. The study’s path analysis concluded that TF participation tended to have a positive influence on current participation in primary education.[24] It is difficult to assess the extent at which Fair Trade initiatives positively impact the human capital of Latin American smallholders since numerous factors’ effects must be considered, including individual households’ priorities and cultural traditions. Nevertheless, capacity building is a critical component for encouraging sustainable development, as it is necessary for smallholders and members of co-operatives to be able to operate and make unified decisions upon how to invest their fair trade premium efficiently. It fosters a balance in power between the Fair Trade coffee roasters and retailers in the periphery, as well as the smallholders in Latin America or the core.

SOCIAL CAPITAL 

The evaluation of changes in the social capital of small-scale coffee farmers in Latin America examines the process of empowerment, the social recreation, levels of migration, and participation and decision-making within the co-operative as well as the community.[25] Soppexcca’s organizational objectives succeeded in opening up spaces for the empowerment of their members, encouraging Jinotega smallholders to take part in events in order to create a culture for them to feel that they are part of. Also, members were motivated to establish closer relations with the general manager of the organization as well as between buyers and co-operative members.[26] The Soppexcca cooperative union has shown an increase in the engagement of smallholders in the cooperative’s governance and decision-making, as “[it] consists of a general assembly and a board of directors made up of [small-scale] producer members.”[27] Jinotega’s small-scale coffee producers “[…] became part of a fair trade system, not only in events organized by their co-operative, but also at the community level” (137). “[Their interactions with development included involvement in] health and peace committees, sports activities, parents’ committees at school; and with national or international development NGO’s operating in their regions.”[28] Fair trade’s empowerment objective stresses the importance of allowing smallholders the ability to experience unity and have their voice be heard. This encourages production efficiency as well as sustainability within their communities.

However, the extent to which the self-governance of smallholders’ efficiency is debatable. “The president of Soppexcca has alluded to the problem of inefficiency of many co-operatives due to “high levels of illiteracy […] low educational levels, and the lack of knowledge about how to manage legal, commercial, organizational and fair trade requirements,”[29] among the members and the board representatives. Furthermore, as a result of a lack of education there is “a lack of knowledge about the international coffee market [and fair trade] and the low capacity to interpret its trend,” which inevitably leads to weak international negotiation power in the supply chain and reduces efficiency of small-scale coffee producers.

A case study on the Guatemalan Loma Linda Cooperative investigates the local dynamics of the social vision of fair trade[30] and addresses the significance of solidarity in contributing to sustainable livelihoods of smallholder coffee producers. The cooperative was founded in 1977 by a Spanish Catholic priest, “Celestino,” emphasizing “the significance of individual rights to livelihood and the importance of employment and access to land,”[31] which challenged the power legacy of local landlords since colonial times. Furthermore, it banned middlemen and prevented the sale of land and individual commercialization of products which permitted producers to legitimize themselves as the organized embodiment of solidarity relations.[32] In the 1980’s, the Loma Linda Cooperative joined the FEDECOCAGUA (Federation of Coffee Cooperatives of Guatemala) which promoted fair trade practices and economies of scale. However, soon discontent among smallholders arose due to lack of circulation of information and transparency. Queries on how the Fair Trade premium funds were distributed to local cooperatives, as they did not seem to directly reach to local producers, resulting in discontent and political resentment against FEDECOCAGUA.[33] The study reveals the problems that Fair Trade faces in ensuring the Fair Trade premium trickles down to reach the smallholders and improve their livelihoods, and how the “paths to Fair Trade generate different texts[34] in a context in which people’s life worlds become fractured to embody a diversity of solidarity and fair trade categories.”[35]

In 2004, a case study conducted in the rural region of Oaxaca, Mexico questioned the sustainability of the Fair Trade organic coffee mechanism in regards to the migration opportunities.[36] The study explained the increased trend in migration of labor in the Cabeza del Rio community in search of greater opportunities abroad has caused, “wages [to double] in five years […] [while] the fixed price of Fair Trade coffee had not risen in over ten years.”[37] This raises the question of how efficient FLO and Fair Trade certifiers are in investigating and ensuring that the Fair trade coffee price and premium amount paid to smallholders adequately meets the minimum living standards of smallholders and provides poverty alleviation.

FINANCIAL CAPITAL

An examination of the financial capital[38] reveals the contribution Fair Trade has had on raising the living standards of small-scale coffee producers in Latin America.[39] In theory, the fair trade provides a stable coffee price and a premium to small-scale producers to effectuate poverty alleviation. Additionally, it encourages local smallholders to compete in production of quality coffee.

A study focusing on smallholders in Jinotega, Nicaragua reveals a disadvantage of trading with Fair Trade organizations is the use of ‘open account payment’ methods which does not offer immediate payment for each sack of coffee delivered. [41]  This has shown to create the risk that some producers will breach contracts, especially when the international cost of coffee is similar to the Fair Trade price.[42]

The following study investigates the Fair Trade coffee trade between Nicaraguan smallholders and Finnish consumers, by questioning, “How efficient is Fair Trade in redistributing wealth from consuming countries to producing ones?”[1] This relates to the ‘Coffee-paradox’ theory which argues that the global coffee business is creating wealth in the consuming or core countries while smallholder farmers and laborers in the periphery are exploited and remain in poverty.[2] The Finnish Customs’ statistics estimate, “the average price paid for all green coffee imported to Finland in 2006 [was 1.95€/kg and] […] estimates a transportation and insurance cost of 0.07€/kg of green coffee.”[4] Additionally, the study estimates that approximately 1% of the retail price paid by Finnish consumers goes to international coffee trade stakeholders which includes export companies or trading houses. Retailers’ motivation for taking very low margins from their conventional coffee sales stems from their desire to attract customers.[5] Finnish retailers or roasters charged significantly higher prices for Fair Trade coffee than conventional types, and thus greater portion of the premiums paid by Fair Trade consumers, the ethical donations, remains in Finland, the consuming nation, rather than being transferred to the Nicaraguan coffee smallholders, as Fair Trade initiatives advocate.[6] As a result, it may be concluded that Fair Trade is inefficient in redistributing the wealth from developed consuming nations to the core, as a greater portion of the retail price remains in the latter. It is arguable to what extent this claim is valid, as the study does not mention whether the difference in purchasing power in Nicaragua and Finland is accounted for.

Moreover, the French critic, Christian Jacquiau’s controversial book, Les coulisses du commerce equitable, criticizes the effectiveness of Fair Trade and the Max Havelaar Foundation, questioning, “how much of that money ends up in the pockets of farmers in developing countries,”[4] Jacquiau states, “There are 54 inspectors around the world, working on a part-time freelance basis to check and control a million producers. These checks do not take place on the ground but in offices, hotel rooms or even by fax.”[5] He refutes Max Havelaar’s claim that, “€50 million (SFr79 million) has been distributed among small farmers…[while] the organization claims to work with a million producers.”[6] He states, “Here the dream falls apart. [Producers] therefore each receive just €50 a year – or €4 a month.”[7]Jacquiau’s claims have raised debates as to whether Fair Trade’s higher prices and standards are effective in alleviating the poverty of the small-scale coffee producers and encouraging sustainable livelihoods.

PHYSICAL CAPITAL

Finally, the improvement of Latin American small-scale coffee producers’ prosperity is further assessed by addressing their physical capital. Fair trade and other ethical certifications aim to facilitate exchange as well as protect health and safety[8] of workers. However, “developing countries might suffer from structural bottlenecks,”[9] to comply with these standards. These bottlenecks often involve lack of adequate infrastructure, processing technologies, and national regulatory bodies.[10]

The case study of Jinotega’s smallholders and community demonstrates weaknesses in efficiently investing the premium funds to enhance the local infrastructure. Premium funds have shown to be “…[used] for disjointed, ad hoc projects [which] may not have optimized the potential benefit of such funds.”[11] Soppexcca’s social project co-coordinator explains that this is because funds collected from the Fair Trade social premium are insufficient to consider larger community development work such as improving road infrastructure and water and electricity services.[12] In addition to insufficient amount of funding, there is also a limited or even a lack of government support.[13] The lack of adequate physical services such as communication and electricity in most rural communities in Jinotega, Nicaragua, makes communication between smallholders high in the mountains and Soppexcca, through the radio or paper leaflets sent by bus, difficult.”[14] The existence of inefficient modes of communication hinders transparency and open communication between the cooperative administrations and the small-scale coffee producers in order to ensure efficiency of Fair Trade premium financed projects.

SMALLHOLDERS & CONSUMERS

It is debatable whether ATOs such as the FLO are successful in altering power relationships between producers and consumers or whether they are merely another profit-making business that promotes consumerism.[19] The case study conducted on the Fair Trade coffee trade between Finland and Nicaragua provides supporting evidence to the ‘Coffee-paradox’ theory’s claim that the global coffee business is creating wealth in the consuming countries, the core, while smallholder farmers and laborers in developing nations, the periphery, are exploited and remain in poverty.[20] The study demonstrates a greater percentage of the final retail coffee prices actually goes to the consuming nation instead of the producer nation. The ‘artificial’ bond created between consumers and the small-scale coffee producers through societal marketing’s visuals gains the sympathy of consumers and makes them believe they are being socially-responsible citizens by purchasing ethical products to support the less fortunate smallholder producers.

The coffee commodity is “…[demystified], as the hidden layers of information are peeled away to reveal the social and environmental conditions of the commodity’s production,”[21] with visuals presentations of smallholders and their farms. Yet, one must question to what extent the information provided is accurate. The examination of Fair Trade product packaging, has revealed that Fair Trade seems to apply deceptive packaging to attract consumers, as there are subtle differences in Fair Trade labeling among the different certifiers IMO(Institute for Marketecology) and FLO(Fair Trade Labeling Organization) that define whether the product is Fair Trade lite[22] certified or a Whole Product[23] certified. The IMO claims to distinguish the Whole product from a Fair Trade lite product by placing the IMO Fair Trade label for a whole product on the front of the certified product’s packaging while the Fair Trade lite must be placed on the back. Nevertheless, the FLO labels the Fair Trade lite and whole certified products exactly the same manner, which provides ambiguity of to what extent a product is Fair Trade. The Fair Trade product packaging of the Organic & Fairly Traded very Dark Chocolate: 71% cocoa content bar by Equal Exchange[24] demonstrated inconsistencies in labeling since the back-side states: “By weight 100% Fair Trade content” and “Fair Trade and Social certified by IMO.” This does not adhere with IMO’s certification guideline that a Whole trade product label must be placed on the front of the product packaging. This arouses the doubt on how efficient the Fair Trade certifiers are in ensuring that products are labeled correctly and how they collaborate with Fair Trade advocates such as Equal Exchange. Additionally, a subtle difference exists between fair trade membership, which certifies a company’s commitment to fair trade principles, and fair trade certification, “certification… of the supply chains of specific products”[25], which exists that consumers tend to overlook.

Fair trade consumption may be regarded as a means of encouraging altruistic[26] behavior, as the consumer is manipulated to believe that through a simple purchase of a Fair Trade product he/she is donating for a greater cause, “shopping for a better world.”[27] Fair Trade products have become, “ethical luxury [goods],”[28] that allow consumers to reflect their political, socially-responsible values in society. Consequentially, ethical/green consumption seems to act as justification for our over-consumption.

Furthermore, it is interesting to note that Fair Trade’s link between smallholder producers in Latin America and consumers in the developed nations merely provides a one-way flow of information. Small-scale farmers often lack the knowledge about the consumers and the coffee market. A survey, interviewing cooperative members on their understanding of Fair Trade demonstrated that merely three of fifty-three surveyed members regarded Fair Trade as a means of building relationships with foreign consumers or coffee roasters, and that they primarily viewed Fair Trade as a market transaction paying slightly higher prices than conventional coffee markets.[29] Ultimately, the strongest, most beneficial link provided by Fair Trade seems to be the bond created between the small-scale producers and the roasters, as cooperative membership has shown to encourage capacity building and provide information about international coffee market trends. Capacity building plays a crucial role in enabling small-scale producers to invest their Fair Trade premiums efficiently to improve their livelihoods and international negotiating power. 

  CONCLUSION

The research conducted has shown that, although the Fair Trade mechanism is a valid method of promoting sustainable development in peripheral countries, its implementation in those very nations should be more thoroughly refined. This would enhance its efficiency in promoting sustainable development as well as increasing consumer credibility and support. The most beneficial link provided by the Fair Trade mechanism is the direct relationship it facilitates between small-scale producers and roasters. Cooperative membership has shown improvements in the capacity of smallholders’ human capital as well as their international negotiation power. Ultimately, this alliance is vital in the pursuit of sustainable development.

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