‘Fair trade’ products turn profits, creating problems for a movement


Fernando Celis, coffee producer and organizer of the demonstration, speaks during a protest in Xalapa, Mexico, on Dec. 13, 2011. Farmers say companies in the fair-trade movement are inflating the costs that are subtracted from payments to growers. (Felix Marquez/BLOOMBERG)
December 31, 2011

In a coffee-scented conference room near Lake Geneva, Ramon Esteve, a sixth-generation commodities trader, sits amid his father’s collection of centuries-old grinders and explains why he’s helping impoverished farmers grow more coffee, cotton and cocoa.

He’s embracing a goal that was first laid out by fair-trade activists so he can secure more sustainable supplies for his company and clients such as Nestle, the world’s largest food company, and Starbucks, the biggest coffee-shop operator.

“For us, it was survival,” said Esteve, 56, chairman of Ecom Agroindustrial, one of the largest coffee traders. “We’re not philanthropists. We’re businessmen.”

Esteve’s blunt acknowledgment shows how a mission-driven movement is transforming into a corporate push for productivity and profit. A cause begun in the 1980s by a Dutch priest and his activist-acolyte to help coffee farmers in the Mexican state of Oaxaca now includes some of the world’s biggest sellers of coffee (Nestle), lingerie (Limited Brands), chocolate (Kraft Foods’ Cadbury unit) and bananas (Wal-Mart), to name a few.

New research has quantified the benefits to the bottom line: In a study released this year, researchers at MIT, Harvard University and the London School of Economics found they could boost bulk coffee sales by 10 percent just by adding a fair-trade label on the packages. Sales of goods approved by Fairtrade International, the world’s largest certifier of such products, soared 27 percent in 2010, to more than $5.7 billion.

The push to increase sales of goods deemed not to have involved child labor and other practices has divided the movement, raised questions of whether going mainstream will undermine the cooperative farmers it was created to help and, most of all, strained the integrity of the certification systems that vouch for the fair-trade stamps that allow companies to charge consumers more.

“The fair-trade movement has profoundly lost its way,” said Aidan McQuade, who advised Cadbury on cocoa buying as director of London-based Anti-Slavery International, a human rights organization founded in 1839. “Its focus on volume — unless they have got all their systems in place to address fundamental issues like ethical trade, child labor and child slavery — is problematic.”

The strains are evident in the work of Fairtrade International, a Bonn-based network of 25 organizations that certifies more than 100 products from cotton to gold around the globe.

Over the years, Fairtrade’s auditors have found breaches of standards in the industry that led to the suspension of certification until corrective action was taken, said Barbara Crowther, spokeswoman for the Fairtrade Foundation.

Children harvesting cocoa

Fairtrade International took a year and a half to commission an independent review after BBC disclosures in March 2010 that children harvested Ghanaian cocoa certified by the group for suppliers to Cadbury and others, McQuade said.

“It has taken longer than we originally planned to get this underway,” Crowther said of the independent review, which she described as “an assessment of Fairtrade’s whole approach to tackling child labor in cocoa in the region.”

In a statement, Fairtrade International said that as the organization has grown, “we have strengthened our certification systems and our global operations so that Fairtrade is more robust.”

Still, the problems illustrate the difficulty in broadening the reach of ethical commerce. “To spread the benefits of fair trade we have to mainstream. It’s challenging, but we are determined to do that with integrity,” Crowther said.

The group’s struggles to police its own system come as the number of ethical labels has mushroomed. The creation of 202 such labels in the past decade boosted the total tracked by Ecolabel Index to 424. That includes those created by companies, such as Starbucks’s own stamp for its producers, CAFE Practices.

The growth has thrown into question the very definition of fair trade and exposed rifts between the movement’s founders. What evolved into Fairtrade International began in 1985 when a Dutch priest, Frans van der Hoff, and a trade-campaigner friend, Nico Roozen, met in the Netherlands. In a supermarket, they discussed how to bring coffee grown by Mexican cooperative farmers to consumers. “Our coffee belongs on these shelves,” Roozen recalls van der Hoff telling him.

The pair developed a system under which farmers were guaranteed a minimum price and a social premium for projects such as clinics and schools. They dubbed their label Max Havelaar, after the idealistic Dutch colonial officer in a 19th-century novel about the coffee trade.

Founders now at odds

Fairtrade International still uses their model, paying farmers premiums totaling $164 million from 2007 to 2010. Fairtrade estimates 1.15 million farmers and workers were in the system last year.

Today, van der Hoff and Roozen are at odds over how best to help producers as demand surges for fair-trade goods.

“The two founding fathers of the movement are taking different positions,” said Roozen, 58, the son of a tulip farmer. “He is criticizing fair trade because it is making compromises with big companies like Nestle. And I am criticizing fair trade because they haven’t taken the lead in mainstreaming fair trade.”

Farmers must be trained to partner with major corporations so they can boost volume, said Roozen, director of the Dutch nonprofit Solidaridad. He works with Ecom, where Esteve’s chief adviser on sustainability issues, David Rosenberg, considers Roozen a mentor. They say they can offer farmers better prices and help in boosting yields.

Van der Hoff and his allies say corporations will offer those prices only until fair-trade cooperatives wither and die.

“It just ends in fair-washing and smokescreens,” said van der Hoff, 72, who still lives with the Oaxaca farmers he started helping three decades ago. “They are deceiving themselves.”

Fair trade is increasingly a marketing strategy where the farmers’ poverty is a necessary ingredient to make consumers feel good about themselves, said Bill Fishbein, who founded Coffee Kids to provide health and education services to poor coffee growers. “We are way overpromising and under-delivering,” Fishbein said. “Those farmers have become a sales tool.”

Different companies use different language: fair trade, sustainability, shared value. They say they’re working toward a similar goal: improving the quality of farmers’ products and lives.

Fairtrade International tries to ensure farmers more of a product’s final price by giving them a social premium.

“There is another way,” Harvard University professor Michael Porter said during a debate at the World Economic Forum in Davos. “Why are farmers poor? Because they have lousy yields. Because the quality isn’t good enough, and therefore the prices are very low.”

Nestle announced a plan last year to double purchases of coffee from growers for its Nescafe brand to help guarantee supply and boost quality.

“We are trying to buy more coffee directly from farmers because then we can track where it comes from and give technical assistance,” said Nestle spokeswoman Melanie Kohli. “We want to build long-term trust.”

Ecom is expanding programs to help farmers improve their harvests because its supply base dwindles when growers don’t make enough money.

Taming the coyotes

“What do you do to keep them on the land? You train them,” said Esteve, a Spanish national who lives in Switzerland. “These people could easily, easily double their yields by enrolling in these programs and following the best practices we are trying to promote.”

Esteve said he understands the concerns of Mexican farmers and advocates such as van der Hoff. In the 1990s, fewer growers were selling beans to Ecom’s buyers because they weren’t paid enough money by independent middlemen, known as coyotes, he said.

To establish trust, Esteve said, he hired some of the coyotes and trained them as agronomists to teach the science and economics of better crop production.

The move to work directly with farmers is a historic change for Ecom. Esteve wouldn’t disclose a financial statement for the closely held company, though it has average annual sales of $2.7 billion, according to a document on the World Bank’s International Finance site, which is considering lending Ecom $50 million to develop its services to farmers.

Like Nestle, which is based in Vevey, a few miles from Ecom, Esteve said his company’s programs are too new to provide evidence that they’re helping farmers. Ecom is compiling information on its farmers and how they work.

The disagreement over how best to boost fair trade led to the departure of Fairtrade International’s U.S. affiliate, Paul Rice, an American who wants his Fair Trade USA group to work much closer with large companies. He proposes certifying coffee grown on estates, rather than just on cooperatives. “Executives are realizing that old-school globalization, by which I mean going around the world looking for the cheapest labor and the lowest environmental standards, doesn’t work,” Rice said.

The future of fair trade boils down to Roozen’s and van der Hoff’s rival visions. A test of their arguments can be measured in Mexico. It’s here that Juan Carlos Lopez, 24, an adviser to the Café Guerrero Maya cooperative in Chiapas, said he can quantify the cost to farmers if big companies win the day. The difference between the market price for coffee and prices paid for Arabica beans by intermediaries buying for Ecom’s Mexico unit, known as Amsa, amounts to at least 30 percent of a farming family’s revenue, he said.

“All they do is buy it cheap and sell it at a high price,” said Lopez, who is studying economics at a university in Mexico City.

His family and the more than 200 other indigenous producers who make up the Café Guerrero Maya cooperative aim to sell fair-trade coffee overseas at higher prices — and, one day, challenge the Esteves with a producer-owned supply system featuring a chain of shops modeled after fair trade that would sell beans bought directly from farmers.

“We have to find the best profit,” Lopez said, “which is through selling directly to the consumer and not some intermediary that pays whatever price they want.”

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