Friday, January 04, 2008

Roasting Fair Trade Coffee

Some coffee drinkers raise the incomes of poor farmers by choosing to pay a premium for "fair trade" coffee. Is this sensible? In particular, why would someone buy fair trade? What are the costs of buying fair trade? Could the benefits of fair trade be purchased more cheaply in some other form? Let's take these issues one at a time.

What is the coffee drinker trying to achieve by paying more? Unless the coffee drinker is drinking fair trade coffee merely to be cool, he is probably trying to help the poor coffee farmers. And unless the coffee drinker has a personal attachment to workers in the coffee industry, he is probably trying to help poor people in general, and sees paying more for coffee as one way to do that. From here on out our analysis will focus on whether paying a premium for fair trade coffee is a good (or cost-effective) way to help the poor.

What are the costs of buying fair trade? The obvious cost is the difference between the price of a bag of fair trade coffee and a bag of free trade coffee of similar quality. If you buy a bag of fair trade coffee for $5 instead of a similar free trade bag for $3, you have $2 less in your supply of funds to give to the poor.

But this is not the only cost. Consider the scene in the coffee farming community. The "fair" trade coffee industry must select a few coffee growers to receive the above-market "fair trade" rates for their beans. If this fair trade rate is substantially higher than the free trade rate, it would be surprising if neighboring coffee farmers do not exert substantial effort to position themselves to get the higher rates. This jockeying for access to the lucrative fair trade contracts does not produce anything in and of itself, and it distracts farmers away from continuing to support themselves in whatever way they did before the fair trade contracts showed up. To what extent this happens is hard to measure, but it surely must be counted as a cost to the coffee-farming community, both as a social cost (how can you feel good about the neighbor who gets twice as much for his beans) and as a material cost.

A final cost is the loss of efficiency in the coffee intake/processing/distribution process. Leading fair trade companies such as Equal Exchange do not have careful estimates of what portion of the $2 premium on a bag of fair trade coffee gets passed on to the farmers, but there is strong reason to believe that this portion is less than 100%. Fair trade companies tend to be small and hence lack the corporate infrastructure and economies of scale that the large companies achieve, so they tend to have higher overhead costs, which eat into your precious $2 premium.

Therefore, the extra $2 you pay for a bag of fair trade coffee arguably benefits the poor coffee communities by substantially less than $2. This brings us to the final question. Could the benefits of fair trade be purchased more cheaply in some other form? In other words, is there a way to deliver your $2 to the poor without incurring corporate inefficiency or the material and social costs of the jockeying effect?

Existing charitable programs deliver medicine and education to the poor and it is quite possible that many of them could deliver your $2 to the poor with lower overhead costs than than a fair trade organization. However, it is difficult to evaluate the effectiveness of most of these programs in a way analogous to our evaluation of the fair trade industry. In order to demonstrate the silliness of the fair trade movement, we will design an aid organization that delivers money to the poor at a near-to-100% efficiency rate.

Here is how it works. You give your $2 to our hypothetical aid organization. The organization sends the money to the sister branch in a poor country, and it's employees take the money and drive through the country side and cities, stopping occasionally to discretely give a small box of money (or write a check) to the inhabitants of any home that is suffering from obvious and extreme want. If such an employee can distribute $10,000 in a day and requires only $100 in wages, we're looking at overhead costs of little over 1%.


Anonymous Facts Please said...

First of all, give me some facts. How much of my "two dollars" is not
being effectively used. I buy from MCC. What is the overhead?

Second, what are the social implications of simply handing out money to those who appear to need it?

Third, if more and more people buy fair trade, then the business will be bigger and there will be less overhead, at least according to the
Freakwenter. And as there is more demand, there will be room for more
and more farmers to participate. Also, usually fair trade coffee is
produced in communities, right? The farmers are most intimate with other fair trade growers, no? Again, I need more facts.

3:03 PM  

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