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Socially Responsible Business

The Future of Fair Trade…Is There One?

If Fair Trade coffee quality doesn’t improve, the Direct Trade movement will quickly become a growing threat.

Quality control workers in the packing plant of a large Sumatran coffee co-op. Over the past 15 years, Fair Trade Labeling Organizations International (FLO) and Fair Trade labels have played an important role in driving consumer awareness and demand for socially and environmentally sourced products. For years, FLO/Fair Trade have been flag bearers for small-holder empowerment and have pushed a desperately needed agenda. But today, serious questions loom about the relevance of Fair Trade organizations and labels. The debate revolves around Fair Trade’s impact—or lack thereof—at the base of the pyramid (BoP), and its ability and desire to accomplish its original mission.

A recent investigation by a team of BoP supply chain experts from I-DEV International uncovered some critical weaknesses within three Fair Trade supply chains. For a month, the team traversed jungles and mountains and lived in remote villages of Sumatra, Indonesia. Their mission was to gain a firsthand understanding of the local dynamics, livelihoods, and day-to-day challenges of Fair Trade farmers who produce much of the Indonesian coffee, cassia (sold as cinnamon), and black pepper that the developed world consumes. The team left Sumatra after a harsh reality check for Fair Trade subscribers, but they also identified a few clear opportunities to redesign Fair Trade and revive its relevance.

I-DEV supply chain team with coffee farmers in Takengon, Sumatra. I-DEV’s team met with nearly 100 farmers, collectors, and co-op managers. The resounding observation was that while many of the farmer co-ops have reinvested their Fair Trade premiums and profits to become highly sophisticated, professionally run “businesses” with well-equipped processing and packing plants, the majority of farmers were disconnected from this process, and virtually all of them saw their co-ops as just another external business that paid a collector (intermediary) to buy their harvest. Farmers felt no sense of ownership in the co-ops, and many admitted that they were members of several. The most disconcerting observation was that not a single farmer I-DEV spoke with could say whether their life had improved financially or otherwise since the arrival of Fair Trade.

Surprisingly, many farmers were completely oblivious about where their products were sold, how much they sold for, or what they were used for. When one of I-DEV’s team pulled a chai tea bag from his pocket and asked a group of cassia farmers if they had ever seen a product that contained cassia (cinnamon), shockingly, no one in the group ever had. To them, cassia was just tree bark, and no one had ever explained how the rest of the world used it. In fact, virtually none of the farmers from any of the three supply chains knew how much the co-op received or how much the collector (the local elected representative of the co-op/ intermediary) earned compared to their own earnings. (This is Fair Trade 101!) Many could not recall the last time they received any training or saw any of the co-op training staff. For them, the only tie to the co-operative was the local collector. One collector even physically threatened a farmer for talking to I-DEV’s team.

In order to remain relevant and reclaim its place as innovation leader, Fair Trade must remember and re-engage the individual farmer. It can do this by restricting certification so that it only goes to organizations that truly empower and forward-integrate farmers—teaching them to move up the supply chain and ensuring that an increasing amount of the value added stays at the farmer level. More specifically, Fair Trade might establish a tiered certification system, something like LEED certification. It could also use individualized scorecards to evaluate organizations based on continuous improvement, measuring key factors such as shortened supply chains (I-DEV found as many as 5 to 7 links along supply chains before exportation, which is ridiculous!).

Finally, any redesign of the Fair Trade labels must include a quality component. Beyond BoP impact, poor bean quality and flavor is hands-down the biggest criticism of Fair Trade. Meanwhile, Direct Trade has emerged as a fast-growing and highly profitable niche of the specialty coffee market—fueled in part by dissatisfaction with FLO’s social and product shortcomings. This premium coffee has sold for as much as $120/lb and undergoes rigorous flavor testing, much like wine does. If Fair Trade coffee quality doesn’t improve, the Direct Trade movement—led by Stumptown, Counter Culture, and Intelligentsia micro-roasters—will quickly become a growing threat.

Read SSIR’s case study “The Problem with Fair Trade” here.

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COMMENTS

  • BY Geri Stengel

    ON June 7, 2011 10:28 PM

    Fair Trade can learn some lessons from micro-credit, another social good sector that has strayed from its mission. However, the micro-credit sector has done some soul-searching, established standards, and looked closely to see what works well and how to stay on mission.
    Perhaps Fair Trade can take the same approach and then share the results so we can all learn what not to do.

  • BY Jason Spindler

    ON June 9, 2011 06:32 AM

    Geri, we completely agree.  Fair Trade does have to adjust to the “growing pains” that it is currently suffering from.  However, I’m not sure micro-finance is the best analogy. 

    As an innovation firm that works to build competitive, viable businesses and industries at the base of the pyramid I-DEV International (http://www.idevinternational.com) has taken a hard look at the micro-finance sector as a whole.  What we have found is that while the micro-finance sector is an important development tool, it is only one small component of development and may actually be fundamentally flawed as “the solution” to moving people out of poverty.  This concern stems from the lack of basic business fundamentals in the micro-finance sector. 

    To build a competitive, viable business that will have a real impact and create sustainable wealth, not only for the entrepreneur but for the village or even the province, you need to be able to take advantage of economies of scale, create diversified products/ services with real barriers to entry, access new, higher value markets, etc.  Except in very rare cases with extremely gifted entrepreneurs, a loan of $400 is simply not enough to build diversified businesses.  You can buy material to sell baskets in the market next to 20 other vendors selling the same baskets, but because none of the products are differentiated, all you’re doing is competing on price with the other vendors, driving revenue down to the point where there is no real return. 

    That being said, micro-finance can be improved upon.  For example, I-DEV has been working with a number of organizations including Developing World Markets, the Inter-American Development Bank and others to develop new micro-finance platforms, such as Aggregated Micro-Lending, which eg. would give loans of $400 to 400 mango farmers in the same area, provided they form, or are part of, a business, coop or association, and invest the money collectively towards productive inputs.  The $160,000 can be used to get their organic certification, access larger markets, higher expert advisors or management, etc.  Other organizations like Root Capital, Grassroots Business Fund, and the entire Social Venture Capital sector have also expanded on micro-finance to offer financing to the “missing middle”.
    All of these strategies build on the solid core of micro-finance improving the overall impact of development finance.  This type of innovative thinking is exactly what the Fair Trade systems need to avoid become the stagnant “IBM” of sustainability.  There is no need to throw the baby out with the bath water, just to continue to innovate and improve.

  • Amaka Okechukwu's avatar

    BY Amaka Okechukwu

    ON June 9, 2011 04:00 PM

    Great blog post Jason & Patricia.  You briefly mention a few ideas for improving on the current Fair Trade standards.  I wonder if you could elaborate on the ways that Fair Trade can be improved.

  • BY Dean Cycon, Deans Beans Organic Coffee

    ON June 22, 2011 12:00 PM

    Thanks for a great article!For me, I think the biggest problem with the Fair Trade certification program (as opposed to the fair trade movement itself) is that it has gotten too big, too fast with the driving force being growth at all costs. This is basically the mantra of the heads of Fair Trade Certified, and something many of us at the grassroots have been warning about for years. My personal take on this is that too many business school types are more concerned with rapid scaling and ultimate numbers instead of insuring that growth is the outcome of a properly functioning system. Fair Trade needs to open itself up and become as transparent and accountable as it demands of the farmers. Fair Trade must be responsive to constructive criticism and not do what so many large corporations do - defend its model at all costs without looking deeply into how it operates and whether it delivers what is constantly refrained in the marketing materials. As Fair Trade has also been captured to a large extent by multinational players (Starbucks, Kraft, Sara Lee, Walmarts, etc.) with a meager commitment to fair trade it remains to be seen whether the certification organization will ever respond to the demands and constructive critiques that have been leveled at it by this article and for years by many of us in the fair trade and social justice movements, including the farmers themselves.

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