Remember, Kids: "Fair" Is Just Another Four-Letter Word That Starts with "F"

Every time I walk into Starbucks to grab a venti triple skim latte, I get irked by the place's incessant moral preening about "fair trade" coffee - its walls papered with pictures and stories of happy Central American coffee growers, each picture/story letting me know that I should not - I repeat NOT - feel guilty about being stinkingly rich enough to regularly drop 5 bucks on a giant, steamy cup of caffeinated water and milk foam.  Starbucks is certainly not alone, and these purveyors have every right to produce, market and their products however they see fit.  But those of us who work in the trade field know all too well that "fair trade" is really just secret code for "the malicious use of subjective hokum to employ latent protectionism" or "the brazen imposition of developed country standards on the developing world" or, at best, "well-intentioned, but misguided (and economically ignorant) marketing efforts that do nothing but raise prices."  (Sometimes all three!)  So the sight of the "fair trade" label has never sat well with me.

I've always thought that it was this last definition - the well-meaning-but-economically-ignorant one - into which almost all "fair trade" coffee efforts fell, so when I walk into Starbucks, or pretty much any other hipster coffee hangout, I get irked (and smugly so), but not irked enough to walk out.  (I do love me some overpriced latte.)  While the marketing efforts were clearly feel-goodism gone awry, I never really thought that they were hurting anyone other than the dumb/lazy, rich consumers who were willing to pay a little bit more for our "fair trade" drinks.  However, after reading this illuminating piece by Duke University's Mike Munger about the troubling effects of the "fair trade movement" on poor local farmers, I might just need to start getting my sweet, sweet caffeine fix elsewhere:

Here is the basic economics--a rent is being created: a price above market price is being charged. In countries where property rights, contracts, and rule of law is tenuous, feel-gooders and scam artists have put together an unholy coalition. The feel-gooders create something called "Fair Trade" certification, which means that the farmers get paid well above market price for the coffee they produce.

Not surprisingly, many farmers want to get in on this action. But less than all can be certified "fair trade" recipients, since a price that much above the market price would create a surplus. The fair trade feel-gooders would never be able to sell the glut of coffee if EVERYONE gets fair trade certification.

So, the feel-gooders stick their fingers in their ears and shout "LA-LA-LA-LA-LA" and pretend that their partners the scam artists are doing the right thing when they hand out the "fair trade" certifications.

But remember that these are countries with little rule of law, and shoddy police enforcement. So what the scam artists in effect do is sell off the rent (the high price of fair trade certification) to the highest bidder.

The result is that, after a fairly short period, three years at most, the "fair trade" farmers are getting no more, and maybe less, than everyone else, and no more than they got before the "fair trade" scam was started. The scam artists, it's true, are skimming the profits, but the competition to become a scam artist then becomes the valuable commodity, and rent-seeking to get to be the guy who certifies "fair trade" then also dissipates THAT rent. Some government official in the country, the one who licenses the guy who licenses the guy who certifies "fair trade" farmers ends up sucking down the rent.

Consumers pay more, and feel good about themselves. The feel-gooders who started the program move on to abuse some other group of farmers with false promises. And the results are a substantial increase in dead-weight loss.

Don't believe me? Article in the National Post, by Lawrence Solomon, founder of Green Beanery in Toronto, a suburb of Buffalo.

And the German study that really reveals how it all works.  In fact, as the Hohenheimers note, the certification process is so corrupt many don't even bother, and just mislabel the coffee as "fair trade" from the get-go.

Solomon's National Post op-ed summarizes the German study and Solomon's own experiences with the fair trade coffee movement, and let me tell you, it ain't a pretty sight:

Today, on World Fair Trade Day, we have something else to feel guilty about. That fair-trade cup of coffee we savour may not only fail to ease the lot of poor farmers, it may actually help to impoverish them, according to a study out recently from Germany's University of Hohenheim.

The study, which followed hundreds of Nicaraguan coffee farmers over a decade, concluded that farmers producing for the fair-trade market "are more often found below the absolute poverty line than conventional producers.

"Over a period of 10 years, our analysis shows that organic and organic-fair trade farmers have become poorer relative to conventional producers."

These findings do not surprise me. I speak as someone who has had contact with various Third World producers in my capacity as president of Green Beanery, a company I founded seven years ago to raise funds for Energy Probe Research Foundation, a federally registered charity that I manage....

The fair-trade business is filled with contradictions.

For starters, it discriminates against the very poorest of the world's coffee farmers, most of whom are African, by requiring them to pay high certification fees. These fees -one of the factors that the German study cites as contributing to the farmers' impoverishment -are especially perverse, given that the majority of Third World farmers are not only too poor to pay the certification fees, they're also too poor to pay for the fertilizers and the pesticides that would disqualify coffee as certified organic.

Their coffee is organic by default, but because the farmers can't provide the fees that certification agencies demand to fly down and check on their operations, the farmers lose out on the premium prices that can be fetched by certified coffee.

To add to the perversity, it's an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations -another source of inefficiency the German study notes in its analysis -lose out....

Most merchants of certified coffees are aware of these contradictions, but most won't be aware of other problems in the certification business. For Third World farmers to qualify as fair-trade producers, and thus obtain higher prices for their coffee, farmers must join co-operatives. In some Third World societies, farmers readily accept the compromises of communal enterprise. In others, they balk. In patriarchal African societies, for example, the small coffee farm is the family business, its management a source of pride to the male head of the household. Joining a co-operative, and being told when and what and how to plant entails loss of dignity....

Some believe that certified coffee is superior in some way. But it is not always so. The small-scale farms whose local ecologies produce distinctive, niche coffee beans can't operate on a scale that would justify official certification. As the German study notes, "Certified coffees have distinct production and marketing systems with different associated costs than the conventional system."

Neither is certified coffee different at all. In fact, at Green Beanery we have received bags of coffee, some labelled fair trade, some not, grown on the very same farm and identical in every respect. The fair-trade certified farmer himself can't tell which beans will be sold as fair trade and which not -that decision is made by the higher-ups.

Because the fair-trade associations are intent on keeping the price of fair-trade coffee up, they limit the supply of coffee that can be labelled as certified. To the certified farmer's chagrin, most of his fair-trade certified crop could end up being sold as uncertified conventional coffee.

And in this well-intentioned pricefixing game, the fair-trade farmer is the pawn and the joke is on the customer.

Be sure to read the whole op-ed.  It's well worth your time.  As the title of this blog post (crassly) states, in the trade world "fair" is just another four-letter word that starts with the letter "F."  And in the case of coffee, it looks like impoverished African and Latin American farmers are getting royally, ahem, faired just so rich coffee-drinkers can feel better about themselves.

(h/t Art Carden)