Union Coffee Roasters emerged a few years ago in the UK at the top end of the coffee trade selling good quality blends and single origins. It speaks the aspirational language of quality. Founder Steve Macatonia has always had a bit of a thing with Fairtrade though and it is good to see him putting pen to paper again in the Guardian Sustainable Business pages published during Fairtrade Fortnight.
I love the debate he stirs up and was stimulated to contribute. I have used his article as a framework for discussion rather than for riposte. I would encourage further contributions from him and others.
Let me be honest that I am a Fairtrade believer, a committed insider and possibly responsible for some of the success. I speak from experience having pioneered and managed 100% Fair Trade food businesses for over 20 years. That said, I also have a few issues with Fairtrade but would use his article and my experience to build on.
What is Fair? Of course we would all like farmers to invest in education, health, climate mitigation, gender empowerment and business development as proscribed by the standards. It’s a much easier emotional sell to talk of the social gain rather than the nitty gritty of business … Feeling uncomfortable that honest values based entrepreneurs have successfully built a billion dollar business around fairness suggests unfairness elsewhere. Yup. Unless you meet the standards you are outside it. The real lesson, remember this is business not an absolutist definition of right or wrong…
A successful safety net for over 20 years
So to Steve’s article. (Sorry once I started it got longer than I planned.. more essay than blog). He starts:
Coffee drinkers want great tasting coffee and coffee farmers need reliable and consistent demand for their crop. Roasters and distributors are seeking dependable producers of high-quality coffee, grown under sustainable environmental and social conditions.
Fairtrade certification set the tone to fulfill the need for socially sustainable coffee production by providing a price safety net to coffee producing cooperatives.
A bit of history, the bi-partisan International Coffee Agreement, which had provided price safety nets for millions of farmers for decades, was collapsed by consumer countries like the UK and USA when they withdrew quotas (the supply/demand lever) unilaterally. As a result the price plummeted in the late 1980’s pushing farmers towards poverty.
Fairtrade was a market based response to this collapse. In 1991, I remember trying to sell (via our new cafedirect proposition) roast and ground coffee of good quality, where people wanted to buy it… i.e. in supermarkets. We became agents for the democratic coops of small-scale coffee farmers who were a good place to begin supply as they could be relied up to negotiate fairly on behalf of their members.
For 6 years or so, cafedirect was the most widely recognised face of Fairtrade in the UK. It was a joint venture between 4 very different businesses or NGOs. Twin, an NGO/coffee trader, Equal Exchange a food selling coop, Traidcraft a Christian business and Oxfam, an NGO with lots of charity shops. We very quickly focused on our new business of creating a brand, selling good coffee in supermarkets. Other NGOs had had a different vision of setting up independent standards for any company to join as a licensee and Fairtrade certification arrived in the UK in 1994, two years after Lorna Young won our first supermarket sales into Scottish stores of The Coop and Safeway. Our paths have crisscrossed ever since, but as a business insider I can offer critical insights into the challenges that Steve outlines.
For most (about 80%) of the last 25 years since the collapse the average green coffee price has been below average cost of production, so for a growing number of farmers Fairtrade fulfilled its safety net mission.
Indeed, it’s success can also be measured by the volume of business and current competitive position of grocery distributors such as Sainsbury’s (entire own ‘private’ label Fairtrade coffee category), global brands (joining lower cost entry certification alternatives like Rain Forest Alliance or Utz Kaffee) or to a much smaller extent private ‘Direct’ self-certified (the alternative traders and likes of Union Coffee). Together these suggest a successful but maturing market.
Remember, Fairtrade is an international certification standard (as are RF and UTZ). It is not just about the safety net, but also about other key business issues for farmers like timely pre-harvest finance. This is facilitated at the request of the coop, either direct lending via the buyers as the alternative traders did 25 years or more ago, and now more commonly via third party lenders such as Shared Interest, Root Capital or Responsibility. These lenders leverage the long term relationship that consumers have with Fairtrade, to take more risk than commercial banks, perhaps another subject for GSB to explore?
Interestingly, no other certification fulfils the safety net function and no other requires fulfillment of a finance function.
Now, to what is I suspect Steve’s main point. He is correct, in my view, to say that Fairtrade is least effective when green coffee prices are high. For instance, in the 90’s when Brazilian droughts cause price spikes despite markets flooded with very low quality coffee or recently when Arabica demand has outstripped supply.
In the rising market coops can use the strength built by participation in the lean years to negotiate a higher price built on expectation of further rises. Yet, especially once it begins falling, they do report some traders using the then downward market to also bid down prices between farmer coops. Is this fair or unfair or just the market working?
Paradoxically the crop finance issue above gets worse for the coops in these markets as cash flows tighten so the pre-finance function of Fairtrade can provide critical advantage.
However, the output of Fairtrade certified production is mostly mass market commodity grade coffee which doesn’t deliver the impact to really change producers’ lives in a significant way.
There is little freedom for the individual farmer and no incentive to focus on quality or innovation.
I think this minimizes the success to date for many farmers and rather simplifies the market.
Fairtrade contracts offer predictability in a historically volatile market. Coffee farmers are as aware of this volatility as any. This very predictability brought by Fairtrade is a success not a failure and a step forward. Yet very very few farmers sell their entire crop to the coop. That too would be risky too.
When an individual family faces the market alone, more often than not, they face prices much lower than the coop pays. Few farmers have a large choice of traders let alone the power to bid up prices! Traders function mostly as cash rich middle men making their offer early when household cash balance is at it’s lowest. Selling a proportion then may pay for schooling or urgent repairs etc. Thus early market signals from Fairtrade buyers can raise cash and compete with middle men so creating more impact.
Not unsurprisingly when the market is rising strongly, farmers do sometimes break contracts with their coops and sell to middlemen, for short term gain, leaving coops in contractual default and lenders having to reschedule.
It would be encouraging if farmers and coops had more choice from an empowered position to negotiate. Any parallel initiative, offering secure steps up the value chain, should be encouraged. Sometimes this may mean coops sell outside Fairtrade, for instance to Union Coffee. If consumers are willing to pay a higher price so be it, but fairs fair don’t undermine the intermediary role the coop plays by persuading farmers to break contracts.
A more sustainable approach would reward excellence. It would be based on quality, innovation, growth and economic progress. It would be accessible to all farmers, not restricted to just co-operatives.
As we examine the quality issue more closely, we notice that very few buyers are willing to invest in visiting individual farmers in any region. I would challenge even a committed buyer like Steve to find an economy of scale in that. The coop is therefore an excellent vehicle for adding economy of scale value, assisting farmers move up the value chain. The coops have long been most successful in supporting the safety net with certification; more and more they can also support quality development.
As coops understand that a shortage of quality Arabica exists, they participate more confidently in supported initiatives whether inside or out of Fairtrade and gain advantages for their members.
This is one area where Fairtrade practice provides good examples of supporting the wider push for better quality. Many participate successfully in regional ‘cup of excellence’ competitions that were pioneered by coops in Nicaragua and have now spread to Africa and Brazil.
Cost, efficiency and choice
In 2012, 430,000 metric tons of Fairtrade certified coffee was produced but only 30% was sold under Fairtrade conditions. Despite investment in certification, farmers would only receive commodity prices for the remaining 70% of their crop.
We come to a section about cost, choice and efficiency. Let’s be clear, the coop invests in and pays the certification not the farmer. If a farmer sells outside it she/he does not incur the direct cost of certification, she/he also takes the risk and opportunity of so doing. Equally, levers do exist within the coop, with boards and managers being removed for poor performance just like in any other business.
In addition, Fairtrade has always consulted heavily during reviews of cost of production. Now farmers are integrating at all levels of both decision making and governance. This surely signals authenticity and clear water between it and other certifications and private/Direct propositions
This brings me to yet another piece of detail. In many places farmers do the first value adding by pulping the red cherry, but full grading is impossible until after hulling. This requires the scale a 1 hectare farm just doesn’t have. The Coop if large enough may do this but it will certainly be able to offer the farmer this service.
In reality all coffee has to be graded. I suspect in many cases, the very best (probably <<5%) will be saleable to buyers like Steve prepared to buy small lots for high prices. The middle 30% represents some of the better grades, leaving the rest below Fairtrade buyers requirements. These coffees are often sold in local markets or as fillers in very large export orders. Critically you might say that if demand is there, coops will ignore Fairtrade and sell the better grades elsewhere leaving the poor grades for Fairtrade consumers. This is indeed a potential issue for the reputation of Fairtrade system. Perhaps it needs more Specialty buyers like Steve, not less, to set the Fairtrade bar higher! At the end of the day each coop will examine it’s own context and try to sell it’s crop as profitably as possible
I would agree with Steve, how can transform quality, especially Arabica quality, upwards on a large scale. This is a problem the whole market is trying to address not just Fairtrade.
Positive social impact from the coffee value chain founded on the basis of Fairtrade certification is limited by world markets.
Again let’s underline that Fairtrade brings livelihood impact both social and economic whilst strong and trusting relationships generate confidence. As a business of course it’s penetration or success is limited by world markets. The issue is can we create a market based model which is more resilient for more small scale farmers in good times as well as bad.
Fairtrade has always consulted heavily during reviews of cost of production. Now farmers are integrating at all levels of both decision making and governance. This surely signals authenticity and clear water between it and other certifications and private/Direct propositions
How can coops move up value-chain?
In 2013 the average world market price for Colombian Mild Arabica was $1.48/lb, (£0.89/lb) which is eight cents/lb greater than the Fairtrade minimum price (not including the optional 20c social premium).
Those roasters and importers who seek high quality, speciality coffee do not rely solely on certification. An alternative trading model focuses on the prices that customers are willing to pay, rather than the market basic or even average price; if it tastes delicious, we want that coffee. For some coffees, this approach can achieve 10 times above the Fairtrade price.
Coop managers respond specifically to the market at any point. As already described, the market price rose in 2009 above that average for first time since 1995 and has remained so since then except for a few months last year.
The Colombian Milds is a good indicator of the grade of many good Fairtrade Arabica coffees. Recent ICO figures show that that price fell from $1.69 in Jan 2013 to $1.48 in June falling through $1.24 but rising sharply again to $2.24 as we speak. (Another climate related story!) Indeed it was over $3.15/lb only 2 years ago. When I worked at EE we were lucky to buy Colombian anywhere near minimum price. Good Ugandan Arabica AA was selling at that level too and Sumatrans even higher. My point is that comparing price and quality is very difficult and all buying or selling decisions depend on the moment the deal is done and outlook on the market.
Perhaps Steve also uses the term ‘alternative’ here to mean ‘other’, you will now find that the UK Fairtrade Foundation highlights the best practice from the so-called Alternative Trading world. Best practice from it seeks to give coops the tools to make good decisions at all times. Indeed, without the best practice of Twin, cafedirect and Equal Exchange amongst others, consumers impression of Fairtrade coffee quality would, oh dear, indeed be that of the old Campaign Coffee.
Teaching producers how to evaluate and grade their own coffee helps farmers to understand what buyers might be looking for, and puts them in a stronger negotiating position. It also encourages continued improvement.
This is a widely copied innovation more licensees should participate in. Twin and others have been setting up cupping labs in coops ever since they pioneered cafedirect Machu Picchu selections in the late 1990s, so Steve is right getting this quality feedback back to farmers cost effectively is critical.
One of the most profound examples comes from Twin’s award winning work in the Democratic Republic of Congo conflict zone. Following 6 years of investment, farmer led coops (supported by certification minimum price) can enter European and US markets for the first time and moved average prices for individual farmers from -40 to +40 against the NYC average plus a premium. This example spreads confidence indirectly as well as directly throughout a community and can only be done lead by cooperatives with the secure market and potential pre-finance that Fairtrade offers.
Farmer initiatives such as the Joint Marketing Initiative change the entire dynamics by moving them up the value chain. How can we position Coops in the market place to sell more effectively whether the market is high or low?
Certification is one business tool amongst many that assist Coops and their farmer members on the climb to market access.
Smiley poor people or respected farmers: Who grows my coffee?
Farmers, distributors and consumers should be able to answer questions such as, who roasts my coffee? Who drinks it? What price does it fetch in the UK? Many coffee roasters – let alone coffee drinkers – don’t know which country their coffee comes from, let alone which farm.
I have no problem with traceability. The best quality food always has denomination of origin displayed in some way. If your customer can pay for the system to trace the product to the farmer, whether that is electronic or trust based on a small volume visit, fantastic. The more companies that support and invest in this best practice the better.
Equally if Fairtrade distributors do not promote their source or generalise the proposition to be meaningless, who knows perhaps they are bidding prices down to FT minimum?
No farmer wants you to buy their coffee because they’re labelled as ‘poor’. A sustainable long-term relationship, season after season, works both ways between buyer and producer.
Development professionals have sought for decades to move the imagery and narrative away from charity and ‘poor farmers. Fairtrade is a business concept which is part of that narrative and employs the skills of PR professionals in communicating the positive story of inspirational leadership and farming skill as well as the realties and challenges of daily life. It is re-visionist to suggest the focus was still otherwise. I would stand with Steve and challenge any patronising ‘poor me’ simplifications. That said I am pleased to see him briefly mention the value to farmers of long term and engaged relationships from the coffee trading community. It was exactly that which inspired and informed the expertise in the ATO (Alternative Trading Organisation) movement that pioneered Fairtrade over 25 years ago. I could continue here on learning models. Are we empowering choice or telling farmers what they should do but that reflection can wait for another time.
Consumers may buy cause-related products once or twice, but life’s too short to drink bad coffee – or, arguably, simply waste money on it. Focusing on high quality and sustainable production of coffee is the only fair way to manage the coffee supply chain. This approach is not easy and introduces complexity in explaining trading models.
Absolutely. Quality is precious, there is plenty of bad coffee about and most of it is not Fairtrade. I am the first person to discard a pack after one purchase if I do not like it. However, if the overall quality of Fairtrade was that bad, the market would not have grown and achieved such stability for two decades or more. During that time quality has improved enormously as consumers rejected poor offers and rewarded good ones.
Fairtrade will rightly be challenged by consumers demanding better quality and traceability. Those who want the ‘cask matured single malt whisky’ equivalent will pay for the additional selection cost and the traceability and the relationship for such small volumes. Many of these customers are promiscuous and do not stick with one origin though. They like the change and uniqueness of each offer. There is little stability for the farmer though
These initiatives may require extra effort from consumers compared with buying a pack of coffee with a succinct logo, but it’s more effective for the farmer and more pleasurable for the customer
If Arabica farmers want to move on they will… probably to Union Coffee or the big US Specialty market amongst others but only if the prices are consistently better. The best farmers will always move on and seek a better return on risk and others will follow if they succeed. However consumers will have to demand better quality first.
Aspirations for the 21st Century?
We have seen how developments within Fairtrade, take it beyond a safety net, For example they assist quality development using cupping labs and to develop price risk management strategies for managers, and really upgrade a coops capacity for sustainable business.
Coops are key democratic intermediaries to deliver scale and effectiveness to Fairtrade’s vision amongst coffee farming communities. The Certification business model must work well when prices are higher as well as lower. It must offer competitive advantage for younger, vulnerable or crisis prone coops as well as the more successful. It must spread success both deeper and wider. Above all to expand globally, it must continue to appeal to consumers in markets with several decades exposure to sustainability and perhaps new ones in emerging regions too.
So, perhaps it is time for Fairtrade to look ahead and add more value to its development ‘model of change’… Grown by Women standards would refocus the value chain on the most effective lever for household livelihood improvement and align with UN Millennium Development Goals. A new Robusta offer could leverage the vast instant coffee market, (though preferably one which does not contradict or compete with the current Arabica focus). Both would keep the offer fresh and competitive with the other ethical certification offers and pull in new consumers.
There are many ways Fairtrade isn’t enough, and in a relatively mature market, it does needs to change to stay ahead. However, good cups of coffee are worth a premium and the coffee trade needs branded offers like Union Coffee (and my former company Equal Exchange) that set the quality bar high, whether they are Fairtrade certified or not.