Tuesday, May 22, 2012

Kiva Innovations: Keeping fair trade coffee fair

David Letterman once said, “If it weren’t for coffee, I’d have no identifiable personality at all.”

I think we can all agree that the day would be a mighty struggle without a mug of our morning pick-me-up. Folgers or Starbucks -- it almost doesn’t matter as long as it has caffeine and lots of it.

But the truth is -- it does matter. It matters to you and it matters to farmers all over the world.

In my last blog post about fair trade, we looked at how organizations like Novica ensure that artisans receive a fair price for their goods by cutting out layers of middlemen. Similarly, for farmers, the fair trade system represents a necessary alternative to free markets by leveling the international playing field. It promises fair prices, access to consumer markets, insulation from price shocks, and technical assistance for improving sustainability and productivity.

Without this support, farms languish, coffee sits unharvested, and farmers struggle to make ends meet.

Leveling the playing field

Mexico, currently the largest fair trade coffee producer in the world, hasn’t always had a stable coffee sector. In the 1980s, NAFTA regulations forced the government to close the Mexican Coffee Institute (INMECAFE), leaving small farmers exposed to chaotic price fluctuations during one of the biggest coffee market crashes in recent history.

The United States’ withdrawal from the International Coffee Agreement resulted in the collapse of the regulatory framework for quotas. This led to a massive boom in production in fast-growing economies like Brazil and Viet Nam, which then dumped their cheap reserves on countries that lagged behind.

In Mexico, farmers were forced to turn to coyotes, or informal middlemen, who bought their crops at incredibly low prices. Against this backdrop, the fair trade movement led by Transfair International became a lifeline for many small Mexican farmers.

Transfair International, now part of Fair Trade Labeling Organizations International (FLO), along with other fair trade certification organizations, set standards for producers of certified fair trade products. Today, companies must adhere to these standards if they want to sell their products with the fair trade label. They also require purchasers to commit to long-lasting relationships with small-scale farmers in the developing world.

How fair trade works

These fair trade certification organizations establish a fair price that guarantees farmers will be able to meet their daily household needs with enough left over to invest in community-led development programs. These farmers then democratically choose projects to fund, such as building health clinics and schools, providing training and establishing programs for women.

FLO calculates the cost of sustainable production and the cost of living through rigorous, region-specific processes. The growers and cooperatives are then able to petition for a higher price if they don’t think the arrangement is fair. In this way, farmers are systematically empowered to work with companies to set a just price for sustainable production.

Too good to be true?

When FLO prices were originally established in 1995, economic conditions for both producers and consumers of coffee were considerably better than they are today. Since then, the price of production has increased dramatically, resulting in shrinking profit margins for coffee farmers.

Recently, many organic farmers have found that they’re making only slightly higher profits from their organic coffee, which is significantly more labor intensive. FLO has responded with price increases across the board. But, in many cases, this money isn’t enough.

The rising costs of seeds, fertilizer and transport are quickly outpacing the ability of international fair trade mechanisms to respond to farmer demands for higher pay. As a result, individual farmer co-ops are capitalizing on the influence of their purchasers to fill the void.

For example, Kiva Field Partner and coffee cooperative Unión Regional de Pequeños Productores de Café Huatusco is leveraging the flexible capital supplied by Kiva lenders to fund and expand its loan program for farmers.

As the only fair trade cooperative in Veracruz, Mexico, Unión Regional has been providing loans to growers for years to increase crop yields and reduce the high upfront costs of converting to organic. The result? Higher profit margins and early access to fair trade markets.

By expanding financial services to small farmers through partners like Unión Regional, Kiva is doing its part to make sure that fair trade remains fair.

Ian Matthews is an intern on Kiva’s strategic initiatives team, looking for new partners and loan products to extend opportunities and access to even more people around the world. Ian has an MSc in Global Politics from the London School of Economics and Political Science, and has previously done field work in Honduras. Send him your feedback on this blog series at blog@kiva.org.

This is part of a larger series on Kiva’s strategic initiatives and innovative loan products, which are designed to expand opportunities for more borrowers. Kiva is excited to partner with companies and organizations encouraging fair trade practices.