Global sales of Fair Trade Certified products increased 41% last year, and prospects for future growth are positive. While Fair Trade contracts get farmers a premium price compared to the worldwide market, coffee growers could do better by improving the quality of their product instead of pursuing Fair Trade.
While Fair Trade coffee is generally imported at a significant premium compared to the average market price for coffee and offers greater stability in pricing, it costs less than the premium coffee beans used in other blends at Starbucks. Therefore, the 1.4 million producers who we claim are benefiting from fair trade may do better by producing higher quality products and selling them at the market rate.
Corporate social responsibility advocates who argue that premium outlets like Starbucks should increase their commitment to Fair Trade should consider the potential negative impact of cannibalizing the premium purchases of those organizations. As long as a company supports responsible agriculture on its own, it may create greater value by paying premiums for quality rather than certification.
What is the difference between Fair Trade coffee and normal coffee?
Fair Trade certification of producers, importers, and retailers is performed at the regional level by third-party “certifiers.” In the U.S., the only certifier is called Transfair. Guidelines for certification are set by Fairtrade Labeling Organizations International (FLO). Requirements include:
Price floor:
Fair Trade provides a price floor of $1.21 per pound for producers:
The impact of this price floor is much more extreme when the market price is low. In October 2001 (the most extreme case), the spread between Fair Trade and New York prices was $0.76, or 167% of the market value. In recent years, the market price has been close to the Fair Trade price. When the market price is above the Fair Trade price, the price floor is nonbinding and has no effect on the price of the coffee.
Social premiums:
In addition to the price floor, Fair Trade also requires a $0.10 / lb premium (since July 2006; $0.05 previously) which is used “by cooperatives for social and economic investments at the community and cooperative level” (2006 FLO annual report). This premium is charged to the buyer above the purchase price, even when the price floor is non-binding. That is, when the market price is above the price floor, the Fair Trade price is the market price plus the Fair Trade premium.
Green-washing: Starbucks’ Fair Trade investment
Distributors pay a little extra for the Fair Trade coffee, and they pass that cost along to the consumer. The difference between the Fair Trade price and the market price is represented by the green line in the graph below.
As you can see, the difference (from a consumer’s perspective) between buying fair trade coffee and free-market coffee has decreased in recent years because of a strong coffee market.
The chart below compares Starbucks’ actual 2006 expenditure on coffee beans to two fictional scenarios—one in which all of the coffee was purchased at the NYBOT average market price (left bar) and another in which all of the coffee was bought at the Fair Trade price. This analysis is based on market rates and data from Starbucks’ 2006 CSR annual report. As you can see, the difference is quite small. The additional cost of purchasing entirely Fair Trade coffee would have been $38 million, only 12% more than market.
While a 12% premium for Fair Trade would have been a substantial cost, Starbucks voluntarily chose to pay an even higher premium—for quality. The bar on the right represents actual 2006 spending on coffee beans at Starbucks: $100 million (32%) more than the market price of the beans. Thus, Starbucks producers were better off selling to Starbucks than they would have been under Fair Trade.
Even at market rates, coffee is divided into five classes, and a Premium Grade coffee generally carries a $0.25 premium, which (at recent rates) makes it more lucrative than Fair Trade.
It seems that many producers are aware of the limited value of Fair Trade, because only 20% of the products that could be sold under Fair Trade contracts actually are sold that way.
Conclusions
- Producers can do better than Fair Trade
Currently, only 20% of the products that could be sold under Fair Trade contracts actually are sold that way. The limiting factor is Fair Trade certified distribution outlets, so growers will face the question of whether to embrace Fair Trade as the avenues become available. Rather than relying on a Fair Trade premiums to artificially increase revenues, growers should consider increasing the quality of their product in order to achieve premium prices in the futures market. The $1.42 per pound that Starbucks payed for premium quality coffee is much greater than either the $1.08 / lb market price or the $1.21 Fair Trade price. If I were a small producer of coffee beans, as 70% of producers are, I think I would want to shoot for the high premium that comes with higher quality instead of the more modest premium of Fair Trade.
- Starbucks can do better than Fair Trade
While many CSR fans would like to see Starbucks increase its commitment to Fair Trade from the 6% of purchases that it currently represents, this may not be the path to higher revenues for farmers. By selling under a premium contract instead of a Fair Trade contract, coffee producers could earn more money.
While Starbucks’ 6% investment in Fair Trade is modest in itself, it is much higher than the 0.01% global penetration of Fair Trade products (according to the Fair Trade Federation). Starbucks currently only markets one Fair Trade product in the U.S., the Café Estima Blend™, which is currently out of stock on the company’s website. The $10.45 price point is middle of the road for Starbucks models, further evidence that the quality-premium exceeds the Fairtrade-premium.
While Fair Trade offers farmers other social benefits in addition to the price floor, Starbucks replicates many of these values in its own C.A.F.E. purchasing system. As long as the company maintains these standards, I see little reason for it to specifically target increased Fair Trade purchasing as a CSR objective.
More generally, I note that trendy movements are not always the most socially responsible solutions. Compare Fair Trade with the ongoing organic fad, the benefits of which are largely misunderstood by consumers, and we can see that Fair Trade products are best served with a few grains of salt.
3 comments:
I think that this is a very interesting analysis of the fair trade movement and also touches on some interesting CSR issues.
You mention that coffee growers should consider improving the quality of their coffee. In an ideal world that would be a clear choice. Unfortunately many of the world's coffee farmers live in extreme poverty with little education and no possibility for learning about best coffee growing practices. They rely on how they grew up growing coffee and what makes sense given their cultural and environmental context.
For example, many farmers use the slash and burn methodology for clearing land in order to make room for growing coffee. When this technique is used, the land grows fallow after a few years forcing the farmers to again slash and burn a new piece of land. This obviously hurts the eco-system in which the farmers live and does not allow for a sustainable form of production in order to get premium coffee. (Note that this methodology and the destruction of the eco-system that follows is thought to be one of the possible factors leading to the fall of the Mayan civilization.)
This slash and burn methodology demonstrates the disconnect between best practices and what is actually practiced. It would be great if the coffee farmers did not need to burn down the rain forest and could kill two birds with one stone by producing more premium coffee and sustaining the environment. Unfortunately, education of these best practices is lacking.
As you suggest, it might not be wise for Starbucks to focus on their Fair Trade coffee purchases. It would be better for Starbucks to invest more in other programs that they are sponsoring like those for farmer education. In this way, farmers could learn best practices to make the best coffee and then could sell it at the premium price. Education programs sponsored by Starbucks have come out of their partnership with Conservation International. In Chiapas, Mexico, for example, farmers are instructed on how to make better shade grown coffee instead of resorting to hurting the environment.
In this and many other social responsibility situations there lies the problem of wanting to help but not knowing how to help in the best way. Many times the analysis of the situation is not successfully performed because people just want to help, but help in a way that is convenient for them or that makes sense from their world view. It is when we learn to step away from our assumptions of the best way to help someone that we can really try to learn how we can best help someone by learning how we can help them help themselves.
Given today's media, it seems like the best way to help out coffee farmers is by supporting fair trade. If your analysis is correct, then the best way that Starbucks could help is by empowering the coffee farmers to help themselves. Ultimately this will be the most sustainable form of social engagement. The new knowledge of best coffee growing practices is something that could be passed down for generations, whereas fair trade (regardless of how much or how little it helps) could be just a passing trend.
Yes. As I noted in my post, some of the great things that Starbucks is already doing can be found here.
It was refreshing to read your well-researched well thought out analysis abount the Fair Trade movement and CSR issues surrounding Starbucks.
Many consumers and activists jump on the Fair Trade and Organic bandwagon and attack companies without a real understanding of the issues or reasons behind the criticisms.
Companies like Starbucks have the power to exact social and environmental change and should be recognized for their work.
Here's a recent article on the results of their work and commitment to the C.A.F.E. practice:
http://seattletimes.nwsource.com/html/localnews/2004316303_apwastarbuckscostarica.html
Post a Comment