Fair Trade is NOT the End Goal: Part I

Part I: Reflections from the North: Santiago Paz, CEPICAFE coffee co-operative, Fair Trade Futures Conference, Sept. 2011

Part I: Reflections from the North:

Santiago Paz, CEPICAFE coffee co-operative, Fair Trade Futures Conference, Sept. 2011

In September 2010, Santiago Paz, co-director of CEPICAFE, a small farmer co-operative in northern Peru, stood up at the Fair Trade Futures Conference in Boston and uttered “the shot heard around the fair trade world.” As a speaker on a panel discussing the future of fair trade, Santiago’s words caused a stir throughout the packed conference when he likened the fair trade certifiers (FLO and TransFair USA) to the drivers of a car speeding down the highway. The vehicle careens faster and faster toward its destination; the drivers oblivious to the fact that the small farmer passengers have all gone flying through the windshield. He concluded his remarks claiming that if left unchecked, the fair trade certifiers will end up causing the “extinction” of small farmers… the very people the system was originally designed to support.

Although Santiago was merely reiterating opinions that have long been expressed amongst those working in the fair trade “movement” (interfaith, co-op, academic, activists, and alternative traders (ATOs)), the words carried tremendous weight; coming so strongly and eloquently as they did from a highly respected producer in a forum of this nature. Disapproval was voiced, but the challenge remains: what if anything, can be done to fix a broken system and who will take the next steps?

For some time now, Equal Exchange has been one of a number of ATOs and fair trade activist organizations trying to change the way in which the fair trade certifiers carry out their work. We have protested the entry of plantations and multi-national corporations, such as Nestle and Dole into the system; lobbied to get more producer representation on the governing board; suggested a more transparent accounting and monitoring system, and much more.

At some point it became clear that trying to reform a system that had intentionally abandoned its original principles was never going to produce the desired result. Instead, Equal Exchange reaffirmed our own commitment to small farmers and co-operative supply chains through consumer education and marketing materials (Small Farmers Big Change), and most importantly through our actions on the ground: advanced credit; funding for soil productivity, climate change mitigation, food security, and resource management projects; quality trainings; organizational collaborations; and other capacity building initiatives.

Despite our work to continue building the path forward, this past year has been a challenging one. The fair trade crisis has come to a head at just the moment when economic and climatic conditions have combined to turn the whole coffee industry on its head. Small coffee producers, small roasters, and ATOs are all facing a crisis the likes of which hasn’t been seen before. It is likely that many of these organizations will not survive to see the other side of the crisis.

These factors include:

  • Coffee shortages and increased competition for supply. Climate change is creating severe and erratic weather patterns which are adversely affecting harvests. Rising demand for higher quality coffee in producing countries is also affecting supply.
  • The price of coffee is at an all-time high. This is partly due to supply shortages and increased competition, but is also due to increased and unregulated commodity speculation.
  • High (and unpredictable) prices are creating havoc for producer co-ops, small roasters and ATOs alike. For buyers, high prices increase costs and the uncertainty affects budgeting and cash flow. For producers, price fluctuations make the contract fixing process difficult and can destabilize co-ops.
  • The Great Recession – a low performing economy, high unemployment, and a weak dollar – creates a ceiling on coffee prices above which consumers will switch to other less expensive brands.

For the first time in years, we have a situation where our costs are going up exponentially, but we cannot pass that cost on to consumers. We must compete for supply at source and compete on price in the grocery stores. At just the time when our producer partners need us to pay the highest prices possible (so that their members will not give in to the temptation to sell out of the co-op), our costs are significantly higher than our budget and cash-flow is tight.

What does all this mean for our producer partners?

In most areas, coffee is harvested once a year. In order to have cash on hand to pay the farmers in advance, a co-op must sign contracts with its buyers. Once a contract is signed, fair trade buyers may pay up to 60% of the contract in advance. When the crop is harvested and exported, the buyer pays the remainder. But in today’s volatile market, co-ops are unsure how to fix contracts so far in advance of the harvest.

On a recent trip to Peru, Santiago Paz sat down and explained some of the difficulties. In the fall, the co-op estimates how much coffee they believe will be harvested the following summer and he begins “fixing contracts” with buyers. The fair trade price is always higher than the New York price and so fixing contracts has never been much of a problem. This year however, the New York prices are so high and still rising, and competition for supply so severe, that the fair trade price doesn’t really come into play.

No one knows how high coffee prices will be later that year so the co-ops do their best to estimate. When the coffee starts coming in, the competition (in the form of multi-national businesses) is knocking at the farm gates offering farmers more money for their beans than the price the co-op has promised them. The farmer must either remain loyal to his/her co-op and resist selling to the intermediary (often turning down higher prices), or give in to the temptation and risk losing membership.

Now it’s the co-op’s turn. If the price of coffee is drastically higher than the contract price, the co-op can choose to default and sell to a higher bidder at today’s price. This action could get the co-op sanctioned or expelled from the fair trade system. The co-op can call their buyers and ask to renegotiate, but in our case for example, we have budgeted for a certain price and we may or may not be able to raise that price to help out the co-op. Or, the co-op stays true to its contract, but its members are furious with the manager and the co-op loses huge amounts of money.

Many co-op managers have lost their jobs in these climates; many co-ops have defaulted, lost members, divided and fallen apart. Santiago told me about two very strong co-ops in Peru, one of whom had lost $800,000 this year by fixing too low, and another that ended up splitting in half. He himself hasn’t slept through a night in over a year.

The situation is deeply concerning right now. Add the pressure being put on the co-ops by the Fair Trade certification system itself, and things couldn’t feel more urgent. Santiago’s response has been to write a series of articles explaining the current situation and critiquing the role the Fair Trade system has played in exacerbating the struggles. He calls for a meeting in Peru later this year to “refound the Fair Trade system”. In the months to come, meetings will be held all over the globe to discuss Santiago’s ideas, alternative certification systems, and a small farmer symbol being proposed by a group of Latin American fair trade producers (the CLAC).

What is the future of Fair Trade? Stay tuned; stay informed; stay engaged. Let us know your thoughts and we will keep you posted as it becomes clearer where, when and how we can help shape a meaningful movement that believes in small farmers, alternative trade organizations, and engaged consumers.

In Part II, Santiago Paz offers his perspective on the Future of Fair Trade.

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