The Coffee Trade: Fair, Direct or Transparent?

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Coffee perks up many sleepy-headed Americans each morning, but too few are sufficiently roused to investigate the economic struggles of those who grow and harvest it.

U.S. consumers will spend a projected $13.6 billion for coffee in 2016, largely unaware that a small fraction trickles down convoluted supply chains to 25 million “smallholder” farmers, who rely largely on family labor to tend to their small plots of land and produce four-fifths of global output. Some growers receive less than $1 for a pound of green (unroasted) coffee that may cost $20 a bag roasted and generate $150 at a coffee bar.

A Colombian family with five acres can produce about two tons of green coffee per year but net a mere $195 per month after expenses. That’s too little to improve wages, safety, or environmental practices, much less feed, clothe, and educate children. The result is that the next generation leaves for city jobs and production shifts to plantations, where larger environmental and labor issues persist.

For a half-century, international trade pacts, national laws, and nongovernmental organizations have sought better farming conditions. “Fair trade” programs establish standards, certify compliance, and guarantee farmers a minimum price to blunt market and weather downturns. Label certifications aim to drive concerned consumers to fair-trade products.

Since the 1990s, specialty coffee roasters seeking higher-quality flavors have bypassed commodity market middlemen to source single-origin beans from farmers. This “direct trade” model pays farmers more, but also bypasses fair-trade certifications, drawing scorn from fair traders, who say it supports quality for consumers but not social justice for growers.

Direct traders argue farmers can earn more through superior coffee than fair-trade logos. They emphasize partnerships to help farmers improve quality. Recently, some have begun moving toward a new “transparent trade” model that offers consumers a clear picture of what portion of their coffee spending goes back to growers.

From Colonialism to Fair TradeIn the 16th century, coffee spread from its native Ethiopia across the Ottoman Empire to Europe. Europeans established coffee plantations in their tropical colonies, and ever since, coffee and profits have flowed disproportionately from impoverished producers in remote lands to wealthier consumers in developed nations.Labor abuses and environmental degradation still cling to coffee production. While smallholders also hire laborers, large plantations employ many, who have remained outside the fair-trade regime. On farms and at centralized facilities, milling coffee cherries to remove beans turns scarce fresh water to acidic wastewater that is usually untreated, polluting streams.Smallholders often lack knowledge of and access to markets, which means they rely on intermediaries to aggregate harvests. This opens up smallholders to abuse from intermediaries referred to as “coyotes” who bilk them. Green coffee passes through numerous intermediaries who dry, hull, sort, grade and pack it for commodity export. Government agencies sometimes control export auctions. Importers, dealers, and brokers then distribute coffee to roasters, who sell to retailers and consumers.

Meeting global demand, which is rising 2.5 percent annually, poses a sustainability dilemma. Growing organic coffee under the shade of fruit trees maintains habitat for birds that eat pests. But lower yields require expanding to new areas, often at the expense of primary forests. Open-sun monoculture, using fertilizers and pesticides, boosts yields without enlarging planted areas, but the process depletes soil and has high environmental costs.

Such complexities highlight the challenge of using “ethical consumerism” to achieve social justice and environmental goals. Further, competing label certifications—organic, bird-friendly, shade-grown, carbon-neutral, fair-trade, direct-trade—may confuse consumers.

Fairtrade International, an association of producers and labeling initiatives, certifies 439 coffee cooperatives representing 737,000 small-scale farmers in 30 countries. They produced 521,000 tons of certified coffee in 2012-13. That constitutes only 5 percent of world production, which the International Coffee Organization estimates at 141.4 million 60-kilogram bags, or 9.4 million tons.

Fairtrade International guarantees $1.40 per pound (plus 30 cents for organic) and a 20-cent premium to cooperatives for programs that benefit members. Because production exceeds fair trade demand, farmers have an incentive, when market prices are high, to maximize total income by selling their lower-grade coffee for the fair-trade subsidy and higher-grade coffee at market prices. Fair-trade quality suffers.

Cooperatives can replace coyotes, shorten supply chains and benefit coffee regions, but fair-trade’s meager market share underscores the gap between goals and reality.

 

From Fair Trade to Direct Trade

In 2011, Fair Trade USA left Fairtrade International in a fight over broader participation versus higher standards. Fair Trade USA, a nonprofit that certifies fair trade standards, proposed expanding eligibility to individual growers, including large plantations. Fairtrade International called it a betrayal of cooperatives and launched Fairtrade America, its own nonprofit that certifies fair trade standards, further muddying public perceptions.

Most large U.S. retailers remained with Fair Trade USA. Some, like Costco’s Kirkland Coffee and Mondelez, chose Fairtrade America. Starbucks uses its own externally audited standard called C.A.F.E. Practices (Coffee and Farmer Equity). It reported 96 percent of 400 million pounds sourced in 2014 met the standard, with 8.6 percent certified by Fairtrade International.

Some specialty roasters dropped fair trade participation after the split. Several direct-trade pioneers were founded in the 1990s, leading a coffee movement that treats coffee as an artisanal product, like wine. Chicago-based Intelligentsia Coffee and Stumptown Coffee Roasters, based in Portland, Ore., operate coffee bars in multiple cities and sell bagged roasts online and in stores. Counter Culture Coffee, in Durham, N.C., skips the bars and focuses on educating wholesale customers and farm partners.

Direct-trade roasters use photos and stories featuring the farms where beans are sourced to highlight their partnerships and emulate wine appellations. Most espouse the fair-trade goals of economic empowerment, sustainability, and transparency. Some issue sustainability reports and employ third-party auditors.

Sustainable Harvest, a specialty-grade green coffee importer in Emeryville, Calif., sponsors regional “Let’s Talk Coffee” events that assemble producers, roasters, financiers, and other supply chain members to share ideas. Counter Culture has shifted from paying premiums for small batches discovered after harvest to guaranteeing premiums in advance to farmers who apply quality practices at the farm level.

Vega Coffee moves the model closer to vineyards that have their own wineries, training Nicaraguan farmers to roast coffee using wood fires. Vega acts as exporter and importer, flying packaged coffee to its U.S. warehouse and selling to consumers online. Shortening the value chain and shifting more value to farmers, Vega says, earns growers four times what cooperatives pay.

While direct trade lacks fair trade’s formal structures to verify environmental and workplace standards, the model has proven effective in raising growers’ share of coffee revenues.

 

Toward Transparent Trade

In 2015, a team at Emory University’s Goizueta Business School created a retail price index of direct-trade, single-origin coffees as a benchmark for comparison with commodity exchange coffee. It also created a website listing prices paid to coffee growers.

Transparent Trade Coffee currently has 15 registered roasters offering 35 coffees. Each specifies the farm, location, retail price, green price paid to growers (GPP), and effective grower share (EGS), which ranges from 17 percent to 36 percent and averages about 20 percent.

GPP is only one factor in economic, social, and environmental sustainability, but it is a key one. EGS gives consumers actionable information now lacking in fair-trade logos. Perhaps other metrics will follow. Labels could offer sustainability panels like those for nutrition or QR codes allowing consumers to access the information on smartphones.

Transparency is no panacea. But tangible, visible metrics could help educate and motivate more consumers to choose sustainable coffee, raise its share of total production, and help farmers.

Corey McKeon

Corey McKeon

Corey is the marketing manager of Whitman online programs for 2U Inc. The Martin J. Whitman School of Management has partnered with 2U to power and support MBA@Syracuse and Accounting@Syracuse. He is responsible for executing marketing activity for both online master's programs. After receiving his B.S. in marketing from Johnson & Wales University, he went on to earn his M.A. in communication, culture and technology from Georgetown University.
Corey McKeon

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