The Coffee Crisis: Is Fair Trade the Solution?

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Case Study #10-8 of the Program: ''Food Policy For Developing Countries: The Role Of Government In The Global Food System''


Coffee is an important crop widely grown in the developing world. The economies of some countries, particularly those in Central America and parts of Africa, are highly dependent on coffee as a source of both national income and export earnings. About 25 million people, most of whom are small-scale farmers, rely on coffee for a living. Smallholder coffee farmers once reaped abundant benefits from their crop. Cash from coffee sales financed schools, hospitals, infrastructure, and training for farmers. Coffee-producing regions were also associated with higher income levels, higher literacy rates, higher nutritional levels, and less political instability. But all these benefits have evaporated since the late 1990s, when the world coffee price slumped to unprecedented low levels. The collapse of coffee prices has led to a humanitarian crisis with devastating effects on coffee growers, communities, and countries. In the absence of government intervention in the sector, a number of innovative approaches, most notably the Fair Trade movement, have been proposed to revive farmers' incomes from coffee production. The Fair Trade movement seeks to challenge historically unequal international market relations, transforming North–South trade into an avenue of producer empowerment and poverty alleviation. Recently the Fair Trade movement has been characterized by national labeling initiatives coordinated under the Fairtrade Labelling Organizations International (FLO). The FLO certification is designed to help coffee growers gain direct access to international markets at guaranteed premium prices. Fair Trade has had some success, but it also raises a number of issues. First, there is substantial concern about how much growers can actually benefit from this scheme. Although studies have shown that a decent share of Fair Trade premiums do reach growers, a large portion still goes to companies' profits or to administrative costs of Fair Trade organizations. Second, it is questionable whether Fair Trade can be a long-term solution to the coffee crisis. The cause of the coffee crisis is oversupply, so the high prices Fair Trade offers induce farmers who would otherwise seek other alternatives to stay in coffee production, exacerbating the current situation. Third, the Fair Trade practice itself may be an inefficient means of wealth reallocation, making it susceptible to criticism from economic grounds. Recognizing that the current coffee market problems are complex, policy makers have twin objectives: to meet the short-term needs of poor farmers during the crisis and to find longer-term solutions to overproduction in the market. Obviously, the most effective long-term strategy to assist the majority of coffee growers is not to create a niche market, but to help them explore other potential sources of income and dismantle barriers to switching crops. Before such a longterm strategy can take effect, however, Fair Trade should continue to be pursued. Your assignment is to design an international coffee agreement to solve the problems now facing the farmers. By accounting for the different parties involved—coffee-producing countries, coffeeconsuming countries, and nongovernmental organizations (NGOs)—you are required to identify both challenges and opportunities in the negotiation process.

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13 pp.

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Fuzhi Cheng (2007). Case Study #10-8, ''The Coffee Crisis: Is Fair Trade the Solution?''. In: Per Pinstrup-Andersen and Fuzhi Cheng (editors), ''Food Policy for Developing Countries: Case Studies.''13 pp.

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