Is Fairtrade coffee a good idea?

By Alex Singleton | 17 January 2005

It is often argued, including by organizations like the Fairtrade Foundation, that we should buy "fair trade" coffee. The argument is that the free market has failed coffee farmers. So we should do out bit and pay a few pence extra for a cup of coffee.

The low price for coffee is partly free-market caused. Coffee farmers in Brazil mechanized - they "substituted capital for labour". According to Oxfam, five people and a machine can produce the same output in Brazil as five hundred people in Guatemala. The other major cause of lower prices is the World Bank. It used loans to encourage South American farmers to switch from growing cocoa to coffee. The actions of the World Bank, which is owned by governments, is really government failure rather than market failure. But this is a technicality. The fact is that too much coffee is now being produced. With greater mechanization likely in the future, the price is likely to keep falling.

The market signal to coffee farmers is that they should exit the market. This is difficult in many coffee-producing countries where a free-market does not exist. It may be necessary to pay bribes to switch production, for example. But it does sometimes happen: many Kenyan coffee farmers switched from coffee to growing cut flowers, now on sale in florists in the United Kingdom. They make more money as a result of the switch.

Coffee farmers are also hindered by the European Union's protectionist policies. Instead of preventing processed and packaged goods from poor countries, we should enable poor farmers to sell us finished products, ready to go on supermarket shelves.

Given that it is difficult to switch production, though, surely Fairtrade a good idea? It is clear that those on the scheme are paid more, and that is good. It is easy to show photos and case studies of Fairtrade farmers who have benefitted.

But in economics, it is important to look at both the seen and unseen consequences. To the extent that Fairtrade is successful, it also has a negative effect on the price of coffee. By encouraging coffee farmers to stay in the market and increase production, it leads to further oversupply in the market. This has a downward effect on the incomes of farmers not on the scheme.

So the Fairtrade scheme has winners and losers. But it fails to deal with the real problem: that too much coffee is being produced. We need to help people to move away from coffee, not keep them in the market.

I was debating against a director of CafeDirect a few months ago who proudly held up a packet of Mexican Fairtrade coffee. The world would be a better place if he wasn't buying Mexican coffee. Unfortunately, 25% of Fairtrade coffee on the market is from Mexico. Mexico is no Britain or America, but compared with other coffee producers, Mexico is a rich country. It has access to American and European markets through preferential trade deals. Only 18% of its labour force is employed in agriculture, whereas in Ethiopia - the inventor of coffee - it is 80%. Average incomes in Mexico are $9000 a year, compared with $700 in Ethiopia. And, unlike Ethiopia, it is rich enough to deal with moving away from coffee. So why is the Fairtrade scheme helping Mexicans stay in the market?

The reality is that the Fairtrade scheme is making matters worse. There is a need to get the richer coffee producers out of the market, and also a need to provide help to coffee farmers to switch production. Helping to keep people in the market may make us feel good, but it does not solve the problem.