SOCIAL RESEARCH REPORTER

Monthly commentary from our Social Research Analysts

SEPTEMBER-OCTOBER 2012

Whats Happening with Fair Trade Coffee? Small Farmers versus Large Plantations
In 1973, the first fairly traded coffee came from small farmers in Guatemala and was exported to the Netherlands. Some years later, the first certification label, Max Havelaar, appeared. Now, fair trade coffee is estimated to represent around 5% of the total world trade in coffee.1 Many consumers are aware of the idea of fair trade products with a vague idea that products labeled fair trade are somehow better for the workers who made that product. Many people also believe fair trade is a relatively new idea, borne of the era of mass globalization. But the idea of fair trade was preceded by other ethical shopping campaigns. For example, the free produce movement initiated by the Religious Society of Friends (Quakers) in the 18th and 19th century, was a non-violent boycott against goods produced by slave labor. Some suggest the fair trade movement as we consider it today, began in 1946 when Edna Ruth Byler, a Pennsylvania Mennonite, traveled to Puerto Rico and was shocked by the poverty she witnessed there. She met talented women artisans who were struggling to make a living. She purchased their needlework, and for several years she sold their work from the trunk of her car. After many years and phases of development, Ms. Bylers initiative expanded to become the well-known, non-profit retailer, Ten Thousand Villages, which now boasts over 80 stores in the U.S. plus an online business.2 The early years of fair trade may have focused on handcrafts producers, largely because of their contacts with missionaries, but the movement has grown to include many agricultural products, including coffee, chocolate, sugar, tea, bananas, honey, cotton, wine, fresh fruit, and flowers. Coffee is one of the truly global markets, grown in more than 50 countries around the world. In recent years, Brazil, Vietnam, Indonesia and Columbia
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have produced the majority of the worlds coffee.3,4 Other growing regions include Hawaii, Costa Rica, Kenya and Mexico. Coffee is traded as a global commodity; in 2010 it accounted for trade worth approximately $16.4 billion.5 The fair trade concept is premised on the belief that small producers in developing countries will benefit from receiving a consistent and fair price for their products. These benefits are expected to have a significant positive impact on the economic and health status of the growers as well as their families and communities. In an industry that includes 25 million farmers and coffee workers, fair trade has the potential to touch many lives.6 In the broader coffee market, coffee is subject to price fluctuations over time. Coffee sold under a fair trade arrangement is sold at a guaranteed minimum price or a reference market price, whichever is higher, plus a fair trade premium which is roughly 15% of the total price.7 Under this pricing arrangement, consumers ultimately bear some of the risk and enable the benefits that accrue to the producers. The amount of fair trade coffee exported to the U.S. alone increased 32% between 2010 and 2011.8 Many Western brands now proudly display a fair trade certification. However, there are currently rumblings within the fair trade coffee industry over the use of fair trade certification labels and the meaning behind these labels. The governing body of the fair trade system is Fairtrade International (FTI) based in Bonn, Germany. It was founded in 1997 to unify global fair trade organizations and provide a consistent labeling structure. Consistency in labeling should make it easier for the consumer to understand what is involved in the production of the certified coffee and make it easier for producers to participate in the growing fair trade market. The FTI standards have traditionally been reserved for coffee grown on
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small farms and sold through democratically run, farmer-owned cooperatives. In the U.S., the key fair trade certification body is Fair Trade USA (FTUSA) which, until recently, conformed to the standards of production and labeling set by FTI. In January 2012 FTUSA split from FTI in order to pursue standards that would allow large coffee estates and independent small farmers to produce a fair trade product. This rift in the fair trade movement has caused considerable controversy. Both FTI and FTUSA are still focused on marketbased support for coffee producers. But people of good conscience can disagree on how best to affect positive change. Paul Rice, CEO of FTUSA believes the expanded approach will reap benefits for more farm workers. By adapting fair trade standards for both workers on large farms and independent small holders, Fair Trade USA can reach more than 4 million farm workers who are currently excluded from the system.9 Green Mountain Coffee and Starbucks, the two largest sellers of fair trade coffee in the U.S., say theyre staying with FTUSA for now, waiting to see how the new standards evolve. Both companies insist they still want to protect small farmers. Rodney North, spokesperson for Equal Exchange, the Massachusetts-based co-op that has been at the forefront of the fair trade movement in the U.S., warns that FTUSAs move into large coffee growing operations will jeopardize the economic well-being of the small farmers who have traditionally benefited from the fair trade movement.10 Equal Exchange has
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dissolved its relationship with FTUSA. Vermont Coffee Co. also broke off from FTUSA this year. Owner, Paul Ralston, said he doesnt need to wait for the jury to come in on FTUSAs experiment to expand the reach of fair trade coffee. We are still a fair trade product, we still trade under fair trade guidelines, but we no longer put a fair trade certified logo on our product.11 Both sides are currently cultivating supporters. Equal Exchanges Authentic Fair Trade petition has collected more than 8,000 signatures and backing from 550 organizations. FTUSAs initiative, Fair Trade for All, has many signers including John Mackey, the CEO of Whole Foods, and Arturo Rodriguez, president of the United Farm Workers of America.12 Decades ago the fair trade movement developed as a response to poverty. Many consumers and investors still believe helping farmers and producers achieve a better quality of life through meaningful work is a noble cause. We know our socially conscious investors believe that as well, so as we review our retail sector companies we pay attention to the ways in which they respond to the fair trade concept. The fair trade coffee market can be a labyrinth of well-meaning policies, competing incentives, unintended consequences, and unknown impacts. Although we would hope for a more unified approach, we applaud the efforts of the various fair trade organizations.

Van Hilten, Hein Jan. The Coffee Exporter's Guide - [3rd Ed]. Rep. International Trade Centre, n.d. Web. 22 Oct. 2012. <www.intracen.org>. 2 Brief History of Fair Trade. N.d. Www.ftrn.org. 3 Van Hilten, Hein Jan. The Coffee Exporter's Guide - [3rd Ed]. Rep. International Trade Centre, n.d. Web. 22 Oct. 2012. <www.intracen.org>. 4 United States. United States Department of Agriculture. Foreign Agricultural Service. Coffee: World Markets and Trade. USDA, June 2012. Web. 5 Van Hilten, Hein Jan. The Coffee Exporter's Guide - [3rd Ed]. Rep. International Trade Centre, n.d. Web. 22 Oct. 2012. <www.intracen.org>. 6 "Coffee FAQ." N.p., n.d. Web. 23 Oct. 2012. <www.globalexchange.org>. 7 Van Hilten, Hein Jan. The Coffee Exporter's Guide - [3rd Ed]. Rep. International Trade Centre, n.d. Web. 22 Oct. 2012. <www.intracen.org>. 8 2011 Almanac. Rep. Fair Trade USA, n.d. Web. 24 Oct. 2012. <www.fairtradeusa.org>. 9 D'Ambrosio, Dan. "How Fair the Trade?" The Burlington Free Press 5 July 2012: n. pag. Factiva. Web. 25 Sept. 2012. 10 Ibid. 11 Ibid. 12 Sherman, Scott. "The Brawl Over Fair Trade Coffee." The Nation. N.p., 22 Aug. 2012. Web. 15 Oct. 2012. <www.thenation.com>.

Legg Mason Investment Counsel www.lmicglobal.com/sri The views expressed are subject to change and do not necessarily reflect the views of all Legg Mason Investment Counsel personnel. Any mention of a company or sector should not be construed as investment advice and should not serve as the sole basis for an investment decision. Any data cited have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.