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Does Fair Trade have a future?

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Coffee prices on the NY"C" have been skyrocketing for months; producer cooperatives struggle to keep up with the competition on the ground; and "fair trade" has reached as challenging a moment as ever. In March, FLO responded with an increase to the required social and organic premiums to meet FLO cert criteria -- resulting in a new minimum price for organic and FLO fairtrade at $1.90/lb. As happy as we are to see FLO move in this positive direction, we have to wonder what kind of impact it will have on the ground. In the article below, Santiago Paz offers insight into the hard reality of a high-price coffee market, where traditional "fair trade" methods are being challenged daily and where the future of the movement has yet to be determined.

by Santiago Paz, co-manager of CEPICAFE and manager Norandino cooperative in Piura, Peru

(translated from Spanish)

April 1, 2011

FLO's March press release on increased Fair Trade minimum

According to a 2009 report by TransFair USA, the total premium received by producers reached US$48,209,688. From this total amount, coffee accounted for approximately $45,411,000m, which is 94.19%.  For many organizations, coffee continues to be the only (or primary) product with which they work, and what happens with this product will define the fate of Fair Trade for them.

This analysis is from the point of view of the producers and we encourage our friends and partners to participate, bringing forth ideas that work towards the objective of emerging from the current crisis with stronger organizations.

This juncture forces us to keep close eye and evaluate the support and resistance of the NY“C”. From this perspective, we have to ask ourselves: Will Fair Trade withstand this crisis? And what will become of those who refuse to adapt to this new context -- will they simply disappear?

Over the course of the last five harvest seasons, coffee co-ops in Peru have exported, on average, 17% of the total exported volume.  That same percentage was 13.22% in 2006 and 17.19% in 2010.  In the same time-frame, the number of FLO-registered cooperatives jumped from 36 to 60.  The number of cooperatives has grown by 66% while the exported volume of those co-ops has grown by only 4%.  The biggest exporter of Peru exported 24.34% of the total volume of coffee in 2010.  This exporter’s registry number in FLO is 5497.  Seven private exporters are on the registry.

Peru exported 4,987,137 quintales (46 kilos each) in 2010 for a value of $886,575,683.  La Central COCLA holds seventh place, CAC la Florida tenth place.  Café Peru, CENFROCAFE, CEPICAFE and CECOVASA are in 15th, 16th, 18th, and 19th respectively.

The coffee-growing region is 380,000 hectares, 135,000 of which are certified.  The average productivity per hectare is 13.12 quintales of exportable coffee, of which at least 35% is certified.  This indicates that we have a supply of 1,338,215 60-kilo bags of certified coffee.  This volume makes Peru the most important origin of certified coffee.  We know that certified coffee is produced almost exclusively by producers organized in cooperatives and if they only export 17%, it’s understood that 50% of that volume must be getting sold on the street or to private companies.  This would also indicate that there’s a surplus supply of 30% for certified coffee.

Harvest season in Peru begins in March or April.  Producer organizations finance the majority of their purchases from members with social lenders that require signed contracts as collateral.  At the beginning of the year, the social lenders come to the “Junta Nacional del Café”, an event organized by our union.  Importers can meet with their suppliers along with lenders who, along other requirements, ask for signed contracts.

Normally, financing covers 60% of the minimum price.  After seeing market prices rise above the minimum, lenders “suggested” that co-ops fix contracts all at once, to get the most money out of the transaction.  Many contracts were fixed at prices ranging from $1.50 to $1.80 [which ended up being much lower than the price at which co-ops then had to buy from their members].  There are several organizations that honored the signed contracts and later were unable to receive enough financing because the lender who was the one who suggested fixing contracts in the first place, claimed the risk was too high and held refused to lend.

There are organizations with contracts that start at $135/100 pounds.  The clients refused to renegotiate contracts and FLO’s position has been unwavering: contracts must be fulfilled.  The importer cannot lose money.

Producers have informed the CLAC of the problem and CLAC has called for a renegotiation of differentials and prices.  FLO has responded with an announcement to revise the minimum price -- an action that will take effect April 1st 2011.  Ignoring the current reality, they are modifying rules for the future.

The social premium of FLO until the end of March is 10 cents per pound.  The differential for Peruvian conventional coffee until 2008 was NY"C" -5 cents.  Then a significant change for the better occurred.  Since 2009 the differential was raised, on average, to +20 cents and FLO followed with +10 cents.  It will change to +20 cents as of April 1st 2011.  It’s been a couple years since the NY"C" price has stayed above $1.25 which has been the minimum price for FLO.  Now that the NY"C" price is closer to $3.00 – and according to many experts’ forecasts, it won't return to $2.00 – FLO has raised their minimum price to $1.40.

The loss of competitiveness of FLO’s premium along with the voluntary and/or suggested fixing of contracts at a low market, mean that organizations are dealing with low prices.  Some organizations have been able to fulfill contracts at low prices while others default.  The first scenario results in a loss, on average, of $25,000 per container.   Co-op members, who are dissatisfied with the low prices, blame managers who are eventually removed from their positions.  Others have gone with the organization towards private companies who pay higher prices.  When groups default on contracts, clients tell FLO who immediately begins the process of suspension.  Any incidentals or costs associated with the process are paid by the producers and their organizations.

Fair trade which was born as an alternative to conventional trade, has become more and more like the normal market.  This is due to the pressure or lobbying of the corporations on FLO International, to lower standards and prices of the certified products, never understanding the importance that organizations have in countries like Peru.
By expanding certification, says FLO, we’re seeking to benefit more producers.  In practice, this has not helped strengthen the organizations, and to complicate the situation, it allowed the entrance of private companies who offer cheap certified coffee.

When fair trade stopped being a mark that identified a high quality product from producers who received the best price for it, upon seeing how much power transnationals have en FLO’s decision-making process, some of the founders have opted to withdraw from the organization.  The certifiers have gone a step further and they certify fair trade with names like Fair Choice.  It feels like they’re taking something from us, that our organizations are losing a competitive advantage.  We wonder what we should do: do we let them have it all and leave?  Or do we continue where we are and put up a fight from within?  How will the future of FLO play out?

Original article (en espanol)

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