Blog author: jspalink
by on Wednesday, November 16, 2005

Economist John Larrivee looks at the logic underlying the fair trade coffee movement and applies it to beer and baked goods. It doesn’t quite make sense. Larrivee points out that “the question is not the difference between what different parties to the production get paid, but rather who adds value, how much, and where.”

Read the full commentary here.


  • John Westra

    The analogies of producing Beer and Wedding Cake do NOT provide an adequate comparative model for understanding the dynamics of "Fair-Trade" coffee. The author and many people on both sides of this discussion focus on the opposite ends of the supply/value chain, without addressing the biggest cause of real or perceived inequity, the middle men.

    Most coffee is purchased by agents who are called “Coyotes” by the local farmers. They are called coyotes because of their reputation as opportunistic tricksters and predators.

    A typical Coyote supply chain in Mexico looks like this:

    The first coyote goes from farm to farm in the community. He then sells the coffee to the bigger coyote in the municipal seat. The one in the municipal sea then sells to a regional coyote. The regional coyote sells it to another regional coyote who has government connections in the state capital where the coffee is processed. The business is a representative of an even bigger business (distributor) that exports the coffee. The producer ends up with very little for his work.

    This type of bloated supply chain bears absolutely no resemblance to the beer industry, where grain is often purchased direct from growers or grown on farms owned by the beer producers themselves. Comparing the roasting and brewing of coffee to the art of a master pastry chef is like comparing my soccer skills to those of Pele or Hamm!

    The idea that “The only way to prevent that from happening is to prevent farmers around the world from entering the market or producing more, or to limit who receives fair-trade prices…” is absurd! If the supply-chain bloat (coyotes) were removed from the system, it would make available a huge potential for increased margins by the growers, without disrupting the price consumers pay.

    These types of reforms can only happen if companies like Starbucks cooperate, by exerting pressure on their coffee distributors, to streamline and clean up their supply networks. We should always embrace and promote change that rewards those who actually produce or add value, while removing incentives for those who simply profit at other’s expense.

  • jai jai

    starbucks is of popular complaint because of the consumer culture attached – much like the popularity of celebs warrants article space. starbucks arguably produces a higher decadent [in a bad sense] consumer culture than the cake folks. when it comes to beer – i do hear the issues of local being taken to milwaukee needlessly, paralleling a particular complaint about special coffee biz. what about the folks who make the insta-coffee who argueably do more damage than starbys? they do, but are not of the celeb status – yet they do have movements against them – starbucks embodies more of what the popular cultural movements against such a thing want to eliminate, as well as what the popular culture supporters, like the author, here want to maintain. thus the discussion, did i miss you understanding this obvious point?

    it would seem that you [John Larrivee] do not care to study the opposing side well, or having lacking resources to understand the heart of the issue from another side. [Ed. note: this post has been slightly edited for content.]

  • Ivan Rybar

    If what Mr. Westra says about supply chains in Mexico is true, then a company like Starbucks can get cheaper price of inputs by sending trucks directly to farms. And if there is such opportunity, they would have already done it, in the interest of their shareholders.
    As they haven’t done it so far, I suppose there is not such an opportunity.
    Sorry, but the idea that consumers should exert pressure on companies to cut costs just seems ridiculous to me.

    However, the real problem might be corruption and organized crime in Mexico.

  • Pat Riggins DVM

    The ‘middle man’ seems to be everyones favorite goat, whether one is selling coffee, manufacturing automobiles, or whatever. Fact is, certain functions are necessary in the supply chain. They will be performed, whether by the producer, fabricator, or retailer. There are inefficiencies in any production/distribution/selling chain, but automatically blaming the middle man is absurd.

  • Jim Bowman

    To this good statement, I have added reference to the late 16th-century Spanish Jesuits, Molina and others, who were convinced that only the market can set a "just price."

  • Rob Oliver

    Thanks for a well articulated article. When one examines the effect of subsidies upon the whole of the economy (eg. the lost opportunities from which the funds are diverted), not just their presumed effect on the subsidised parties, the conclusion is undoubtedly that market-based pricing (throughout a competitive supply chain) provides the most broad based long term benefits overall.

    I would like to address one distinction that is not clearly drawn in the article. The distinction is between value and price, and the lack of clarity is highlighted in the following quote:

    "The value doesn’t come from the ingredients, but from the skill that went into the cake."

    Value is a subjective judgement. Price is a function of supply and demand. If the manufacturers of wedding cakes value them highly, they will demand a lot of inputs (both ingredients and skills), and the price for those inputs will rise (if supply of those inputs remains constant). However, if there aren’t enough weddings where the bride attaches value to the cake which generates her willingness to pay a high price, then there will be no demand, the price will fall, and the cake maker will make a loss. That cake maker goes out of business (a "tragedy"), but supply and demand come more into balance for those who remain.

    The market does create a dynamic situation where subjective valuations can be too high for the underlying fundamentals. Too many of us want to cheer when it happens to someone we dislike, and demonstrate our "ample" compassion when it happens to someone we feel is worthy. However, if we point out that "too high subjective valuation" is simply another way to define "greed", then we might benefit by not "throwing the first stone," nor erecting the next throne!

    regards,
    Rob

  • http://blog.acton.org/index.html?/archives/571-The-Fair-Trade-Fallacy.html Acton Institute PowerBlog

    Let me quickly respond to this week’s Acton Commentary:

    While I agree in broad strokes with Dr. Larrivee’s analysis of the questionable assumptions of the fair trade movement, with respect to coffee in particular, I don’t agree that t

  • Jonathan Wortelboer

    While I very much agree with Rob Oliver’s comment on values, I’d also like to point out that the ‘free-market’ principle inasfar as it exists in the west, does not deal with unacceptable conditions of farmers elsewhere, at the offspring of the coffee-chain.

    As a European we tend to get our coffee from other countries in South America, so concerning the fairtrade issues in Mexico I can’t say much. I do know that the exploitation of farmers elsewhere is pretty much local, where their earnings are kept to a minimum by landowners to keep the production price low. This is where the comparison with cake and beer is flawed and where fair-trade comes in: they deal with fair landowners.

    Free market in itself will pretty much adapt to manipulations, yet not in a way to alleviate unacceptable conditions. Human values do require other tools than just the free-market, but on that subject it is shown people think differently in Europe.

  • Aaron

    Hey guys! Its all fun and games until someone trade
    liberalizes your job!

    Seriously though, I would like to focus a bit on
    thinking a bit on how (or rather, why we should) try
    to influence monetary policy in a worldwide economy so that we can do income redistribution in a more
    efficent way, because to me, that is the heart of the
    issue. As the web article points out, Fair trade
    really isn’t an ‘efficent’ way of solving a larger
    problem.

    But to me – it seems that we’ve done enough of doing
    nothing.

    We have to do something.

    Let me take a step back and unpack my second paragraph a bit.

    What we need is more pragmatic way of looking at fair trade.

    If not fair trade for a few, highlighting economic
    injustice, than the alternative is what, doing
    nothing?
    If nothing else, we are building a sense of
    solidarity for people around the world with the coffee
    workers, educating ourselves, and perhaps building a
    movement to real FAIR trade -ie. allowing countries to the freedom to choose to work with by groups like the IMF and the World Bank, not be held to hold to US
    friendly polcies which are effectively economic
    blackmail. What we should do instead is to encourage social democratic principles around the world.

    Fair trade is the first step towards a larger, better
    solution. Nobody wants this to be the final solution,
    and nobody ever said it was.

    I would recommend reading some information on the link between poverty and trade liberalization. A good
    start is this link :

    http://www.ids.ac.uk/ids/global/pdfs/tlpov.pdf

    The broad-strokes overview :
    In the vast majority of cases, increased trade will
    make some group rich and another group poorer or not affect them in a positive way (usually, the second
    group is a much larger group). However, the NET GDP of that community goes up due to increased trade ( a few get VERY rich).

    IF you believe in trickle down economics (ha!), you
    believe that then the whole community eventually
    benefits because money is spent in that area. There
    are many proofs to this theory as a FAILED theory
    because of many secondary effects such as capital
    flight (money isn’t spent in country, but flies back
    home to be hoarded by multinationals in off-shore
    tax-havens). This theory was tried and also failed to
    act as an income distribution method (although a few
    people got VERY rich) in the US during the initial
    Reagan years and now we see the effects again failing in the US under G.W.Bush. (tax cut tax cut tax cut)

    Economic disparity between the rich and the poor in
    the US continues to grow. (as it does in Canada as
    well)

    So the question then becomes, how large a disparity do we allow to occur between the richest and the poorest?
    …or do we just let the ‘market’ choose for us.

    "Rats and roaches live by competition under the laws
    of supply and demand; it is the privilege of human
    beings to live under the laws of justice and mercy." -
    Wendell Berry.

    In my business, high-tech, part of my job involves
    flying to India to work with our software developers.
    I’m told (and I hope to experience this trip soon so I
    can witness to this first-hand) that some of the
    largest disparity of income in the world occurs in
    India around the city of Bangalore. In Bangalore,
    they have the most modern buildings and high-tech
    campuses (with more technology and gizmos in them than exist in silicon valley) due to outsourcing and
    globalization. This is GOOD!

    However, 15 minutes out of town there are farmers who are substinance farming and living in malnutrition and in poor health as if they lived 2000 years ago. This is just bad policy for India, and for that matter, for the world. As Christians we are called to point this out. Why?

    Because sooner or later the poor get sick of being
    poor, and bad things happen. Its in the world’s best
    interest, economically, socially, and in every other
    measure for there NOT to be such dramatic
    distributions of wealth.

    Plus, it just sucks to be poor. I mean, just because
    you happened to be born in Canada means you won the birth-lottery. If you were born in a poor village in
    India, I guess you got the short end of the stick on
    that deal. It could have happened to you! <grin>

    I suppose its not obvious to everyone, but your
    standing in life has a LOT to do with
    a) where you were born
    b) how rich your parents are

    My two cents.
    Aaron

  • Sindi

    Fair Trade

    It is good to think of farming as an enterprise with low barriers to entry. But that misses the point. Farmers in Kenya where coffee is grown do not have a choice. If they had few would farm. Therefore they have to be in production even if they keep on lossing. There is no alternative source of income. The other issue is that coffee tea and the rest are all commodities. These countries control only how much to grow and the quality. The prices are controlled by the buyers. Then there are other things not mentioned. Shipping, information and many other factors controlled by the west.

    It is so easy to claim that market will control who grows and allocate resources. If tha was so then the debate in here in the US about Walmart and China and unfair trade would not be there.

  • http://www.schlacks.org John Powers

    Hey Sindi,

    Why not? That is, why aren’t there other ways to make money besides farming coffee?

    The Atlas Foundation had a brilliant presentation a few years ago about entrepreneurs trying to start a taxi/bus service in Kenya. It was very complex, overly regulated, and in the end, illegal to have a private bus service.

    Perhaps if the Kenyan government would find something else to do rather than track down illegal bus services, there would be more opportunities outside of coffee farming.

    JBP

  • Keith Duhaime

    Just curious if anyone here considered the fact that if a government was practicing ‘fair trade’ coffee, it would essentially be classified as amber under the Uruguay Round, which if I recall could be quickly surmised to be very unethical.

  • edie pettis

    Dude- How about we take some of your energy and thing about creating home grown organic vegetables in our Ada community gardens? One way for people to nourish and cherish land is to have the awareness of being substaned by it in a palpable, immediate way. We don’t have to necessarily focus on large farms (often resistant to community imput) but could honor and encourage that range of folks who are either small farmers or large gardeners. One of our Ada dairy farms (Rose Meyers on 3 Mile and McCabe makes INCREDIBLE white cheddar cheese. It could be a specialty sold in our local stores and markets – or even from a farm market. But, with no incentive or encouragement, that farm ships its’ milk off to Coopersville. Helping close this loop, keeping our products moving through local outlets -Wow! There’s a vision.

  • Erik

    Coffee beans are what are bought and what are sold. Wheat and barley go through extensive preperation and therefore there is a justification for the price increase.

  • John Spiers

    Isn’t freedom the key? Freedom to pursue benefits and contract, freedom from interference? There is nothing in 3rd world cultures that prevent people from improving their lot, and obviously they are very clever people to survive.

    The problem is there is an exploitive class that can if they develop capability and wealth will conflict with the ruling class, which can count on USA to back them against the aspiring class.

    The key is to defund the world bank, IMF, fair trade schemes, and unfund USA foreign intervention… then let the locals fast and pray their way to overthrowing evil regimes that exploit them. Until we pull out, they suffer.

  • Brian H. Ogle

    John Spiers: Culture has a major influence on the progress (and the lack thereof) of people in the Third World. For instance, there isn’t an operative set of individual rights and responsibilities in many African cultures, and so little autonomy for individuals to act as economic agents exists. This has been critical to the Protestant work ethic, a major factor of Western prosperity. Needless to say, you’re right: The people of the Third World are very clever and have done a lot to manage their survival. But progress has been elusive, and part of that is due to culture.

    Fair trade laws teach these cultures the wrong thing about competition and the interplay of free markets in the global economy.

  • Edward Cherlin

    Fair Trade laws to push up producer prices would be a disaster, just like any other price support mechanism. I am not aware of any such laws. There have been "Fair Trade laws" in the US allowing manufacturers to set retail prices, but they are gone, and good riddance. Current proposals for Fair Trade legislation are described as increasing fairness and competition (which we can all approve of), which may or may not be how they would work out. "The Devil is in the details."

    The Fair Trade movement works by certifying particular sellers and growers. The idea is to make the market work more efficiently. We cut out some of the middlemen, and get more of the market price to the producers. Then we get certified, and let informed consumers choose what they prefer to buy. I have been drinking organic, shade-grown (hence bird-friendly), Fair Trade coffee since it first appeared in local stores. I can recommend the practice. The varieties that I have tried are superior coffee, sold at no higher prices than other quality varieties.

    My nascent non-profit, Earth Treasury, is preparing to do this with coffee that we have been offered from Mt. Kilimanjaro and Puerto Rico.

  • Edward Cherlin

    John, you are apparently unaware that US beer is made with heavily subsidized corn rather than wheat as its main ingredient. The corn subsidies are destroying the agricultural base of numerous countries, with predictable results such as a substantial increase in illegal immigration from Mexico.

    We don’t need to provide price supports for foreign producers. We just need to get rid of our own unfair, economy-distorting preferences that hurt all of us.