How Fair is Fair Trade Coffee?

March 18, 2024

Today’s topic relates to a theme that’s become popular over the past decade, and one that often comes up when someone begins to dig into the underworld of coffee.

Is my morning coffee ritual sustainable? Is it 'ethical'?

We could try to understand this question from the points of view of both economic and environmental fairness and sustainability. What’s the environmental footprint of my coffee habit? Is it good for the planet? Do coffee farmers make a fair wage?

Like most of the other top-traded agricultural commodities – including sugar, bananas, and cotton – the dynamic is one of production dominated by manual labour workers making relatively low wages, driven and supported by mass-consumption, predominantly among people with generally higher economic security.

Ironically, the demand-side of the equation, traditionally speaking, has sought to obtain ever-lower prices. But part of the coffee revolution (the 'third wave') is an increased emphasis on this dynamic, with a growing call for recognition and appreciation of (and compensation for) the hard-working farmers producing our favourite morning beverage. That includes ensuring they are being paid fair wages. But this begs the question - what is “fair”?

One company set out to answer this question in a structured and organised manner, way back in 1997 - Fairtrade International. You probably recognize the label – it’s not found only on coffee, but also on bananas, chocolate/cacao, cane sugar, or even cotton clothing.

In this article, we’re going to explore what this label actually means when you see it on a bag of coffee. Should you choose Fairtrade over another coffee? Does it taste different? Should you pat yourself on the back for choosing Fairtrade? Who is it “fair” for – the planet, the people, both? Is it a marketing scheme? Is it just a brand name that has nothing to do with fair nor trade? Is it just a random sticker? Let’s take a look…

Fairtrade meaning

In coffee, Fairtrade certification is granted at the level of the cooperative – a group of coffee producers who typically process and sell their harvests as a collective. Most coffee-growing regions are home to numerous smallholder farmers, each growing coffee trees, who harvest individually but then process the harvests collectively. (As a reminder, processing is a series of steps necessary to get dried green coffee beans from the ripe fruits picked from the trees). Processing is normally done collectively to optimise the allocation of resources, as it's generally more efficient for smallholder farmers to combine and process their lots together (of course, there are exceptions). This also works to help them meet the market dynamics and find sales channels, where coffee exporters generally look to buy larger lots of coffee.

Coffee processing cooperative drying station

A coffee coop processing station (drying stage) (image credit)

The underlying ethos of Fairtrade is based on a set of standards meant to demonstrate that the cooperative is adhering to certain principles related to the fair treatment of workers, environmental protections, and other aspects which you can read more about here - Fairtrade Standards for coffee producers. Fairtrade has recently announced it will be updating its standards to meet the EU’s deforestation-free regulations (EUDR).

These standards are a core part of Fairtrade, and give us an idea of what Fairtrade is aiming to achieve across the social, economic, and environmental spheres. One of the practical ways in which they aim to materialise these benefits is through an economic mechanism designed to support fair wages for coffee producers.

For consumers, without knowledge of these financial mechanisms, by virtue of its name, Fairtrade might invoke a logic such as the following:

I buy Fairtrade coffee > Producers get paid fair wages > They can enjoy a high quality of life

Numerous studies have demonstrated that consumers are generally willing to pay higher prices for coffee that supports this philanthropic logic by sporting the Fairtrade label or demonstrating other characteristics of being ‘sustainable’ or ‘ethical’.[1]

The reality of the situation, however, is a bit more complex. First, we need to understand how Fairtrade actually works to determine and secure fair pay for farmers.

How does fair trade work? The economic mechanisms of Fairtrade

Leaving aside the philosophy and ideology driving Fairtrade, in practice it is based on an economic mechanism with two pillars:

1) The Fairtrade Minimum Price

The Fairtrade Minimum Price works as a price floor. What does that mean? Exactly what it sounds like! Producer cooperatives with Fairtrade certification are guaranteed a minimum price for their coffee, even if the market price of coffee falls lower. This minimum price is established based on many considerations, and updated every so often.

In 2023, the Fairtrade minimum price was increased to $1.80 USD/lb, for washed Arabica beans. If the price of coffee on the stock market were to fall to $1.00 USD/lb, then producers with the Fairtrade certification would be able to sell their coffee for $1.80 – 80% higher than the market price. However, if the market price were to rise, say to $2.00 USD/lb, then the price floor moves up to meet that price. In other words, Fairtrade-certified producers are guaranteed either the Fairtrade Minimum Price or the market price, whichever is higher. This means that sometimes the Fairtrade price might be much higher than the mC market price, but at other times it could be equal.

For some context, from 2000 through to today, the market price of coffee has fluctuated between a low of $0.43 USD/lb and a high of $3.00 USD/lb.[2] So, when the market price crashed, Fairtrade-certified producers were protected with the Fairtrade Minimum Price. When prices shot up, they would receive the higher market value anyway. The following graph demonstrates this price action from late 1980s through to 2023 (black line = C market price; green = Fairtrade Minimum Price):[3]

Fairtrade versus C market price 1980-2023

Note that coffee prices (both Fairtrade and commodity markets) are set differently for 4 different types of coffee – Arabica (washed/natural process) and Robusta (washed/natural). More about the evolution of the Fairtrade Price Minimums can be found here.

Then, on top of the Fairtrade Minimum Price, there’s an additional part – the Fairtrade Premium.

2) The Fairtrade Premium

The Fairtrade Premium is a supplement added to the Fairtrade Minimum Price. As of 2023, it’s set to $0.20 USD/lb for washed Arabica beans. The idea for the Premium is that this money is to be invested in projects, as the cooperative sees fit. A key point here is that the Premium is paid collectively (at the cooperative level), meaning that the members should decide how to invest it, ideally through a democratic process.[4] These investments could go toward, for example:

Infrastructure or equipment to increase harvest quality/efficiency
Training or education for workers
Infrastructure or educational programs to support the local community (i.e., building a school, installing wells, setting up a childcare centre), etc.

Certain coffee farmers are required to spend part of the Fairtrade Premium on quality and productivity, i.e., investing in their operations and the quality of their future harvests.[4]

It’s also worth noting that there’s an additional Premium added for organic-certified coffee, so certified Fairtrade-Organic coffee (so-called FTO) can secure even higher prices.

What is the difference between Fairtrade coffee and normal coffee?

In the following table, we illustrate a few (simplified) situations highlighting the economic benefits for producers of being Fairtrade certified. We see that the extent of the benefit varies according to the market price. In all cases, Fairtrade producers receive higher prices for their coffee, but only if they manage to sell it as Fairtrade! (See the next section…)

Cooperative A (Non-Fairtrade)	C-Market price	Fairtrade Minimum Price	Fairtrade Premium	Final Price
Case 1	$2.00	–	–	$2.00
Case 2	$1.00	–	–	$1.00
Cooperative B (Fairtrade certified)	C-Market price	Fairtrade Minimum Price	Fairtrade Premium	Final Price
Case 1	$2.00	$2.00 (raised to match market price)	$0.20	$2.20 (10% higher)
Case 2	$1.00	$1.80	$0.20	$2.00 (100% higher)

So is Fairtrade always beneficial? Not so fast…

While getting a minimum guaranteed price seems like a no-brainer, we need to also understand that Fairtrade certification is a business. A fairly ethical, well-intentioned business for sure, but a business nonetheless. In order for a coffee producer cooperative to use the Fairtrade label on their products, they have to be formally licensed as a Fairtrade producer.

In other words, obtaining Fairtrade certification has associated costs. Producers pay for the rights to use the Fairtrade label by getting licensed by FLOCERT, the company that deals with certifications for Fairtrade International. (If you’re interested, see here for the Fairtrade International webpage for producers.)

So, we shouldn’t automatically see Fairtrade as a guaranteed win for producers. First and foremost, producers must belong to (or join together to form) a cooperative - a network of producers from the region - in order to apply for Fairtrade certification. Sometimes, for example in remote regions or very small communities, this may not be possible. Other times, regions may have existing dominant sales agreements/channels, which could create lots of resistance against the establishment of new sales agreements. Second, the benefits should not be tallied without due consideration of the costs of licensing and maintenance of the standards imposed by Fairtrade.

As we can imply from the explanation of the pricing mechanism above, it stands to reason that if the market price were to remain above the Fairtrade Minimum Price, then the differential becomes relatively small and may not even offset the costs of obtaining certification. However, price may not be the sole reason for getting Fairtrade certified, and should the market price fall unexpectedly (as it has many times in the past), producers can be guaranteed a price that’s i) more stable and ii) set intentionally with the goal of securing a minimum baseline quality of life for producers.

The potential downsides of Fairtrade

As the saying goes, there are two sides to every coin. Let’s briefly touch on some of the issues raised in regard to Fairtrade. There is even an ongoing debate on the topic, appropriately titled the fair trade debate (note that this applies to other fair trade schemes, not just Fairtrade International).

Fairtrade introduces another intermediary (‘middleman’) into the supply chain – one more party to take a cut. In the popular (yet complicated) alternative trading scheme, direct trade, the main idea is to minimise the number of middle men in order for the primary producer to receive the greatest share of the product value. When we consider that Fairtrade aims to benefit a huge network of producers as well as the planet, this may not be a significant downside. But it’s worth noting.
Market saturation – Every product needs a buyer. In the case of Fairtrade, the consumer demand for Fairtrade coffee determines how much is actually bought from producers. Unfortunately, the attractiveness of the Fairtrade pricing scheme has often resulted in an oversupply of Fairtrade-certified coffee. This means that many producers can’t find a Fairtrade buyer and are forced to sell their Fairtrade coffee as ‘regular’ commodity coffee, for regular prices! In effect, while Fairtrade guarantees a minimum price for the product, it doesn’t guarantee the existence of a buyer for this product! For example, a study from 2015 found that net benefits of Fairtrade certification were null (zero), largely due to this oversupply dynamic.[5]
Even the Fairtrade Minimum Price is not enough to cover production costs in all regions. Production costs differ by region, and it’s been reported that this minimum price does not cover production costs in Mexico or Honduras, for example.[3] This isn’t necessarily a critique of Fairtrade, but an issue with the market price of coffee in general. However, producers aren’t so likely to consider paying for Fairtrade licensing if they still aren’t guaranteed to cover their basic production costs.
There is no monitoring to understand how much of the final retail price makes it way back to the farmers. In other words, retailers are free to charge as much as they want for the Fairtrade-certified coffee, but that doesn’t change the underlying pricing mechanism nor the Minimum Price received by farmers.
There is also no monitoring of how the Fairtrade Premium is spent, leaving room for sketchy business at the level of the cooperative. In such cases of unfair conduct, individual farmers could be deprived of tangible economic benefits stemming from the Fairtrade Premium. Further still, limited reporting in many regions often makes it difficult to prove that farmers are receiving higher prices at all.

So what does it all mean? Should I buy Fairtrade coffee?

If you came here looking for a straight answer, you might be disappointed. In reality, agricultural products and financial markets are complex topics, and it’s very unlikely for there to be a one-size-fits-all solution to the economic hardships of the Global South. The good news is that many studies have shown that Fairtrade does, in fact, do a pretty good job at delivering on its promises. However, it’s not guaranteed to be the case, and the impact certainly seems to be limited in its scope. So, Fairtrade is not likely to save the world, but it does come with some tangible benefits for the planet and for farmers as compared to commodity-grade (supermarket) coffee.

As we discuss in our article on the C market coffee price, it’s relatively rare to find Fairtrade-certified specialty coffee, since specialty coffee importers/roasters are generally paying higher prices on their own terms - and that term is quality (a factor that is not directly/always addressed within Fairtrade). If you find a Fairtrade certified coffee you enjoy – and you can’t find an alternative with explicit price transparency, direct trade, or another way to know that the farmers are receiving a fair price – then it’s more likely than not that your Fairtrade purchase is comparatively more ethical than buying the generic, uncertified (and bland) blend from the big brand names. But most specialty coffee already has some level of economic incentive priced in, rewarding farmers for producing high-quality beans.

Oversimplifying greatly, we can approximate the following guideline for coffee purchasing, in terms of direct economic impact on farmers:

Specialty grade coffee > Fairtrade certified coffee >> Commodity coffee

Conclusions about Fairtrade coffee

In conclusion, obtaining Fairtrade certification is a decision that can offer coffee producers stability and protection against volatile market prices, while it also requires investments to obtain the certification. In the world of ethical coffee, Fairtrade has taken a back seat compared to the direct trade model, which aims to reduce the number of intermediaries taking a cut and reducing the final price received by the farmer. However, direct trade agreements are rarely feasible for smaller coffee roasters, and are subject to their own challenges. The question is difficult to simplify, but if we would try to do so, the conclusion would look something like this:

If you have the option to choose a Fairtrade coffee, it’s likely to guarantee that the producer is receiving fair-ish compensation for their work. However, it doesn’t automatically mean that it’s better than the non-Fairtrade alternative, and it definitely doesn’t imply that the producer is going to become wealthy because of your purchase.