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Fair Trade 101


The fair trade idea is trying to overcome the premises that small-scale farmers and workers are among the most marginalized by the global trade system. The size of each individual farmer's plot or individual workers economic output prevents any bargaining power beyond the local markets. They tend to work for or sell their products at very low prices to local wholesalers and tend not to participate in the value chain between farming and consumer. As a result, they tend to be poor, under-educated, living in community often lacking basic infrastructure and medical care.

In order to help these local, small farmers and their communities, a higher percentage of the value chain needed to be allocated to them. The fair trade concept means that consumers paying a premium for their products and that premium gets directly paid to the local farmer. No wholesaler, distributor, importer, shipper, processor will have access to that premium and cannot prevent passing it on to the original farmer.

Let’s run through an example to understand the impact fair trade practices can have on the typical subsistence farmer in a sub-tropical or tropical country. Let’s say a farmer in Sri Lanka grows tea, coconuts, flowers, spices, vegetables, etc. One of the products that is typically sold by the farmer is the tea grown and harvested by him. The Sri Lankan farmer sells one kg of tea (2.2 lbs.) for literally $0.01 or less to the local wholesaler.

The typical consumer price of 1 kg of tea is about $40, which means the farmer participates with about 0.025% (factor of 0.00025) on the total value chain. Now, if the consumer pays only $1 more under a fair trade approach, that participation changes to 2.5% which is obviously still disappointingly small. $5 would change it to a more reasonable participation of 11%. In our theoretical model, the additional $5 equals a relatively modest 12.5% price increase for consumers. For our farmer though, the $5 more for each kg means they earn $4.99 more per kg than before (a 500-fold increase). Given the typical monthly sales of only 4 kg means the farmers previous MONTHLY income from tea was a measly $0.04. Which now “explodes” to $20 (Sri Lanka’s has a legal minimum monthly income of $56) which gets a farmer almost halfway there. Makes for pretty compelling economics, doesn’t it?

Also, while at it, the fair trade concept also addresses environmental, community, and social issues. These issues include

  • Workers’ Rights and responsibilities

  • Child Rights and Child Labor

  • Gender

  • Workers & Farmers Empowerment

  • Education

  • Healthcare

  • Climate Change

  • Environmental Protection

  • Quality

  • Productivity

  • Accesses to Finance

  • and more

Now, turning the laudable concept into practice is not trivial. How do you collect the premium from the consumer (easy) and transfer it to the individual farmer with a minimum of loss (especially to the intermediaries along the way, who presumably took advantage of the bargaining position of the farmer in the first place)? Ensuring the faithful transfer of the premium to the farmer requires an organization, preferably a non-profit NGO that ensures the premium collection and distribution to the farmer. The NGO needs to work with the retailer to collect the premium (and market the fair trade concept to consumers to justify/promote the premium and create additional demand across other food categories). On the other side the non-profit NGO also has to be present in the community of the farmers to ensure the proper distribution of the premiums to the farmers and the implementation of the community-oriented projects.

The NGO that took on that role was/is Fairtrade International, headquartered in Bonn, Germany. In their latest annual report, 2017, the total amount of Fairtrade retail sales approached EUR 8.5 Billion across 30,000 products, 1599 producer organizations in 75 countries. A significant part of the efforts revolves around organic farming which has moved the needle across the world towards more sustainable work conditions, healthier environments and better food. A very nice visual representation about the global reach can be found here - https://infogram.com/infosite-fairtrade-full-scope-1hxj488nog554vg

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