Understanding Fair Trade
Introduction
With an estimated 2.25 billion cups consumed globally each day, coffee is undoubtedly one of the world’s most beloved and accessible commodities (Samper & Quiñones-Ruiz, 2017). The industry has evolved from traditional bartering to one that generates upwards of USD 200 billion annually, employing tens of millions of people (Coffee Market Analysis, 2019).
Historically, coffee producers are in mostly middle to low-income nations; the top 10 today being Brazil, Vietnam, Colombia, Ethiopia, Indonesia, Uganda, India, Honduras, Peru, and Mexico, with Brazil and Vietnam making up 39% and 17% of total production, respectively (Foreign Agricultural Service, 2024). Many of these nations sit below the poverty line; Uganda, for example, has a significant portion of citizens below the poverty line with a national poverty headcount ratio of 42%, despite being a global leader in the production of such a major agricultural commodity (World Bank, 2024).
Global Coffee Production in 60 KG Bags (2023-24)
Courtesy of the U.S. Department of Agriculture
Coffee Crisis and Introduction to Voluntary Sustainability Standards (VSS)
In the 90s, a historic drop in prices became what is referred to as the coffee crisis, in which hundreds of millions of producers were affected (Cheng, 2007). In its aftermath, an absence of government intervention or regulation opened the door for certifications targeting sustainability standards to emerge as potential industry saviors, which included the Voluntary Sustainability Standards (VSS).
Research Objective
Here, we will investigate the economic impact of VSS certifications on the price volatility of coffee for small-farm producers in low-income countries today, and explore whether or not VSS stabilizes or exacerbates income volatility, in which prices are already reactive to changes in global market fluctuations. When referring to VSS certifications, we will focus primarily on the Fair Trade (FT) certification.
Voluntary Sustainability Standards (VSS) and Fair Trade (FT) Certification
For a producer to implement VSS protocol and become Fair Trade (FT) certified, they must meet environmental and production standards that intend to improve both the quality of the producer’s life and the quality of the product (Samper & Quiñones-Ruiz, 2017). These standards are mostly focused on input materials such as production pesticides and chemicals, as well as the reduction of GMOs. Additionally, all products must be imported by and exported to other FT certified parties, ensuring VSS criteria is met at each level of the production supply chain. Today, FT certified brands include popular gourmet and specialty companies like Nespresso and Allegro.
The VSS and FT certification strive to improve the well-being of producers and farming communities through the betterment of environmental, social, and economic conditions. Due to the volatile nature of industry prices and the resulting impact on producer incomes, FT looks to provide mechanisms for added stability through price floors and premiums, long-term contracts, advanced financing, and sustainability criteria.
Brief Explanation of Industry Volatility
From weather conditions to invasive insects to currency fluctuations, there are many defining factors of the coffee industry that make the multi-billion dollar commodity industry— second only to oil— particularly susceptible to changes in price. Research reveals that these changes are felt most deeply by the smallest producers, followed by wholesale sellers, and finally export prices (Worako et al., 2011). Since these small producers are concentrated mostly in nations that derive a majority of their respective GDPs and output from coffee exports and the agricultural sector, they become especially vulnerable to the volatile nature of industry prices.
To demonstrate a factor that influences both price and resulting income volatility, we will focus on weather and its effect on operations.
Price Volatility Factor: Weather, Uganda Case Study
The Mount Elgon region in Eastern Uganda is one of the nation’s primary production regions for Arabica coffee, where around 300,000 farmers make their living. A study conducted on 184 farmers in this region investigated their greatest areas of concern and found unreliable prices and resulting income insecurity to be the leading issue, with weather as a significant driver.
Coffee prices in Africa are, on average, the lowest compared to the rest of the world, and small producers often use their limited resources for both coffee production and to feed their own households. With 18.7 million Ugandans— over 40%— in poverty, price volatility directly impacts the livelihoods of hundreds of thousands of families (World Bank, 2019).
Through the qualitative analysis of Mount Elgon farmers, 100% of 184 participants described poor road conditions due to rainfall as a major hindering factor to their production process. They described that, “when it rains, we are unable to move,” and that “heavy rainfalls lead to flooding, affecting [their] roads and hindering transport.” Interestingly, 40 of the 184 farmers also believe that “negative changes in the climate have resulted in heavy rainfall,” and that conditions are becoming worse and worse (Bartl, 2024).
Not only does transportation become physically difficult, it becomes increasingly costly. Many farmers cited that rain-related road conditions have “made transport expensive,” and “have hindered transportation of produce to better markets hence selling locally.” With profit and income already the main concerns, additional costs from unexpected, weather-related events are simply unaffordable to many small coffee producers (Bartl, 2024).
With limitations to fewer and more local buyer pools, Ugandan farmers are forced to sell their coffee products at lower prices, which, in turn, reduces their profit significantly. Coupled with additional incurred costs from weather-related property damage, transportation issues, and crop loss, the impact of this volatility can be severe.
The uncontrollable nature of extreme weather conditions makes it increasingly difficult to navigate vital production operations for local farmers in these regions. With a lack of suitable infrastructure, it becomes incredibly challenging to adapt to harsh conditions, let alone cost-effectively. Furthermore, as the current nature of our climate remains unpredictable, communities that rely on small-scale, low-income operations are at an even greater risk of suffering from volatile prices and income.
Income Volatility Overview
With a majority of farmers and their families residing in low-income regions, fluctuations in income as a result of market price volatility can be detrimental to quality of life. As in Kenya, the coffee sector provides employment and food security for millions of people around and below the poverty line globally (Muriithi, 2018).
In a study of 19 million farmers from 5 major producing nations— Costa Rica, Ethiopia, India, Indonesia, and Vietnam— many farmers’ earnings are near or below the regional minimum wage, while others have no minimum wage at all. In addition, many communities have much higher gender wage gaps than their national averages, with many women working entirely without pay (Caro, 2020).
For example, monthly earnings (USD) for all coffee farming employees averaged $37.50 in Ethiopia, $104.40 in India, and $86.20 in Indonesia from 2011-2018. The female averages in each country, in addition, were $35.60, $79.00, and $23.30, respectively (Caro, 2020).
Income Volatility: Politics, Brazil Case Study
In addition to their continuous financial vulnerability, the income volatility of small coffee producers often remains at the mercy of changing political climates and influential government policies.
In Brazil, for example, the relaxation of labor policy had complex effects on their agriculture sector, presenting challenges to their 540,000 coffee-producing households. 2017 reforms implemented more flexibility, aiming to generate more customized contracts between workers and employers; however, this flexibility and lack of formality also created more opportunities for informal and unregulated work, exploitation, and unsafe working conditions (Perosa, et al., 2024). Now, as price and wage are increasingly up to private discretion, supply chain instability and high income volatility are only perpetuated.
On Brazil’s smallest coffee farms, workers are often employed temporarily and for up to 14 days without signing records or contracts. Additionally, although illegal, child labor persists— especially in rural areas. In each of these environments, fieldwork is often tedious, unsanitary, and hazardous, with pay far below-average minimum wages (Perosa, et al., 2024).
Clearly, this deregulation in agricultural labor creates instability in all forms for small farmers, from employment to income to well-being. However, it significantly lowers input costs for employers, exemplifying a scenario in which increasing industry productivity is achieved only at the expense of the supply chain’s lowest-income individuals.
Solution Mechanisms
Clearly, fluctuations in income are extremely impactful for small producers in these nations. Thus, VSS and FT have implemented several mechanisms to promote stability, including a price floor, a social and developmental premium, long-term contracts, and advanced financing.
VSS Price Floor Mechanism
The first stability mechanism is the VSS and FT set price floor per pound of coffee, or minimum price, taken by buyers. The minimum aims to support more consistent, reasonable wages and mitigate the effects felt by price fluctuations in the market (Fairtrade International, 2023).
The FT minimum price must be paid by buyers, even when the global price is lower; beyond that, buyers and sellers are able to negotiate further based on product quality and other characteristics. In August of 2023, the FT International minimum price for washed Arabica, which accounts for 80% of FT coffee beans, was raised by 40%, from $1.40 to $1.80 per pound (Fair Trade International, 2023).
This minimum is calculated based on regional average wages and production costs, however, the numbers are determined broadly and by third parties, and, as seen above, average local wages often sit below the poverty line— as do 44% of global small producers (Dragusanu et al., 2021).
In addition, Fair Trade International recognizes that the minimum price “does cover the weighted average production costs found between different origins and countries,” however, “do not include cooperatives’ and farmers’ costs to comply with new… issues that buyers, consumers, and governments increasingly demand (Fairtrade International, 2023).”
By improving the depth by which Fair Trade considers variables like production inputs, regulatory compliance, infrastructure inefficiencies, and weather impacts, the calculation of the minimum price can be improved or restructured to have a greater positive impact on income stability.
The Fair Trade Social and Developmental Premium
On top of the minimum price is the FT “social” premium— a standing, flat fee of $0.20 per pound paid on top of the minimum price. This premium is designed to be invested in community education, infrastructure, crop facilities, training programs, sanitation programs, or anything of the like (Fair Trade International, 2023).
Although it is extremely difficult to collect data on how these premium funds are spent, given production inputs, inevitable crop loss, the presence of loans, and countless other costs, producers are likely spending the social premium on survival rather than growth.
Fairtrade International states that the Minimum price “does cover the weighted average production costs found between different origins and countries,” but these calculated average costs “do not include cooperatives’ and farmers’ costs to comply with new… issues that buyers, consumers, and governments increasingly demand (Fairtrade International, 2023).”
Contracts and Financing as a Stability Mechanism
Most small producers live in low-income regions with poor market conditions and reduced access to lines of credit, which VSS and the FT certification aims to address through long-term contracts (at least one year) with buyers and up to 60% advanced financing from these buyers, upon request.
In a study conducted on the impact of FT certifications on small farmers in Kenya, it was found that approximately 50% of farmers received this FT advanced financing while 56% took out other forms of loans, in each case to keep up with input costs (Jahan et al., 2023). However, they found that for these farmers, delayed payment remained a major economic burden, regardless of whether or not they received such financing (Jahan et al., 2023).
With a majority of farmers and their families residing in low-income regions, such delayed payments and fluctuations in income can be detrimental to quality of life. In Kenya, for example, the coffee sector provides employment and day-to-day food security for approximately 800,000 low-income households and 5 million people (Muriithi, 2018)
Thus, despite being readily available for certified farms, FT contracts and advanced financing fail to address the underlying issues associated with market price volatility and the resulting income volatility that impacts the livelihoods of small coffee producers.
Analyzing Producer Costs
When investigating small coffee producers, difficulty determining true input costs is a major limitation. For instance, based on the structure of Fairtrade International, certification fees are calculated differently for each producer. In addition, the producers in question often have limited technological resources, making it difficult to collect reliable data.
However, consistency across studies has shown that the processes small farmers must undergo to attain VSS certifications are often costly relative to profits; the most common issue being the requirement of additional record-keeping and regulatory requirements that can stifle productivity. For example, research done in Nicaragua, the 12th largest global producer, shows that the costs of implementing the FT certification outweigh the benefits, on average. Since most of these farmers live below the poverty line, the FT requirements create unmanageable costs and production inefficiencies that they are financially unable to handle (Samper & Quiñones-Ruiz, 2017).
Addressing the Competitive Advantages of Large Producers in the Global Market: Costa Rica Case Study, Advantages of One VS Multiple VSS Certifications
When discussing the income of small producers, it is important to consider the implication of competition with larger, wealthier production organizations. Specifically, does the VSS help or hurt small producers’ ability to compete? Given the importance of certification coupled with the costs, VSS may actually further existing inequalities in the global market.
A case study of the coffee sector in Costa Rica conducted a statistical analysis of the relationship between FT certifications and their intended sustainability goals, including producer wages, profits, and costs. They note that, although VSS is voluntary by definition, it is often vital to survival in the international coffee market today, raising controversy regarding its positive impact on smaller producers.
One of the main conclusions drawn from the study was that, without multiple certifications, there were either insignificant or negative social and economic consequences. For many low-income producers, obtaining more than one VSS certification can be both logistically difficult and financially burdensome.
According to the International Coffee Organization (ICO), the number of global coffee producers below the World Bank (WB) poverty line— 1.90 USD per day— increased between 7% and 50% in 2017 and 2019. During this period in Costa Rica, this percentage increased by about 25% (ICO, 2019).
Thus, if socioeconomic benefits increase alongside the quantity of certifications, producers living below the poverty line will struggle to compete with wealthier plants as they continue to increase their advantage in the international market.
Costa Rica Case Study Data
Data from the Costa Rica sector concluded that, when holding solely a FT certification, there was significant evidence of a price decrease, about 0.04 USD per kg of coffee. In terms of relationship to the WB poverty line, holding only a FT certification made no significant difference, while holding multiple certifications was associated with a daily income per adult about 4.81 times greater than the WB line.
Furthermore, holding a FT certification only was associated with increased crop yields, while holding multiple certifications was associated with both increased yields and coffee income. Although indeterminate, this suggests that although the criteria associated with the VSS may improve production efficiency and agricultural output, there may be an economic trade-off for low-income producers for whom implementing VSS criteria is costly.
Finally, it was found that having only a FT certification was associated with a decrease in daily wage per farmer (relative to the national average wages of agricultural workers), by about six percentage points. In contrast, having multiple certifications was associated with an average wage increase of about five percentage points. This illustrates the possible disparity between large and small-scale producers and the potential pitfalls of having a variety of privately owned VSS certification systems available.
Limits to Data Comparison and Conclusions
Given the nature of the industry, countless studies have been conducted on different coffee production regions around the world. However, depending on the region and variables addressed, they consistently produced conflicting results. This makes it difficult to apply any inferences about the effects of VSS and FT to the income volatility of producers as a whole. Further research could include specific exploration into which factors influence how and why VSS and FT certifications affect different producing communities in different ways.
Suggestions and Ideas for Further Research
Since meeting VSS criteria is the first step to becoming certified, this process should be improved upon to better suit low-income, small producers. The VSS and FT standards are determined by third-party agents unfamiliar with production regions, resulting in criteria that fail to consider the individual circumstances of each farming community. As intermediaries become overly involved, farmers often lose say in day-to-day operational decisions, and the VSS criteria becomes solely a vehicle to achieve further institutional profit through the vertical consolidation of production sites (Utrilla-Catalan, et al. 2022).
For VSS to better mitigate the effects of income volatility, sustainability standards should be approached from a more localized perspective. By utilizing members of the local rather than international, third-party certifiers, standards can be curated more specifically to the needs and ability of low-income farms to better meet VSS and FT socioeconomic goals.
In addition, the disparity between producers with multiple certifications as opposed to those with solely the FT certification should be addressed. Many different privatized VSS certifications, including Rainforest Alliance, Starbucks CAFE, and UTZ, have differences in criteria, fee structure, and production requirements, making it financially difficult or impossible for small farmers to implement more than one. By developing a consistent certification framework, the industry can provide criteria tailored to producer needs to reduce the multiple-certification competitive advantage that large producers have in the international market.
Furthermore, funds from VSS and FT certifications should be allocated more efficiently to better stabilize producer income. For example, the calculation of the minimum price and FT premium could be restructured so that a standard, consistent amount is given as producer income; rather than the premium fee of $0.20 being spent on anything, it could be reserved solely for wages.
Finally, VSS and FT fees should be invested back into farming communities to combat crucial stability issues. Funds can be used to improve resources by investing in roads, transportation infrastructure, storage systems, and education. For instance, providing farmers with the education and funds to implement crop rotation can minimize the impact of weather-related crop losses. Overall, investing funds towards specific, key areas of concern could reduce supply chain inefficiencies that exacerbate income volatility.
Conclusion
Through exploring specific aspects of the coffee industry, it becomes clear that many factors exacerbating small producer income volatility go unaddressed by the Voluntary Sustainability Standards. Although we cannot determine exact producer profit margins, we see that production inefficiencies and substandard resources create burdensome costs and are key areas of concern. Not only that, but the frameworks of both the VSS and FT certification appear to perpetuate financial struggles and competitive disadvantages experienced by low-income communities. Hopefully, these issues will encourage organizations promoting sustainability standards to continuously evolve, adapt, and improve to better meet their stated goal of improving livelihoods.
References
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