Comments on: Fair Trade Coffee: A Simple Supply and Demand Analysis

By: Jim

Jim — Thu, 25 Aug 2005 23:23:02 +0000

Nice analysis. I think the second part, in which you treat conventional and Fair Trade coffee as substitutes, gets closer to the reality. And I think the crucial consideration is, as you say:
“If Mexicans are more easily able to form a producer organisation eligible for the Fairtrade label (groups exporting more than 44,000 pounds of coffee per year and able to pay the $2,431 fee) than Ethiopians, then they will benefit at the expense of their African competitors.”

As far as I can see, that $2,431 fee is not levied on each of the 800,000 family farmers producing Fair Trade certified coffee, but on the 400 producer organisations they belong to (figures from here: http://en.wikipedia.org/wiki/Fair_Trade ). If there’s an average of 2,000 family farms per organisation, then maybe that fee isn’t such a big cost and African producers are not priced out. I agree this area should be explored further though.

By: Fletch

Fletch — Tue, 23 Aug 2005 06:30:42 +0000

Excellent analysis of these markets, particularly from an undergraduate. I’ll offer some suggestions to improve this model. The supply function here is based upon the assumption of perfect competition among suppliers – the marginal cost of coffee production. Looking only at marginal costs fails to cover much of Fair Trade. Indeed, the assumption of perfect competition is inappropriate. From my limited understanding of the Fair Trade Movement, it has basically two intentions: increase the price paid to growers at the bottom of the supply chain by distributors and subsidize costs, such as schools.

The first intention implies monopsony among distributors – growers are large in number whilst distributors are small in number. This is the core of the Fair Trade Movement, which attempts to educate growers on how to negotiate among more buyers in the market. It educates them on basic contracts in which longer-term pricing can be written, a key component of bargaining power.

We would expect that this education would result in a more horizontal firm demand function and, thus, less exploitation of growers. This is an indispensable quality of the Fair Trade Movement. Why? Because producer surplus flows from the distributors to the growers, thus, granting them a fair price, but consumer surplus flows to me, granting me a fair price as well.

Your central point above, though, is valid. Under Mr. Singleton’s assumptions, if some producers exit the market, then all producers face surplus losses, whether they exit altogether or swallow lower profits. The apple doesn’t fall far from the tree with this analysis.

By: green LA girl

green LA girl — Sun, 21 Aug 2005 04:24:51 +0000

Wow — I’m totally not an economist, so I have to say that some of what you wrote about the supply and demand models went over my head. That said, thanks for your thoughtful analysis — which I found much more nuanced and complex than Alex Singleton’s argument.

I actually emailed Alex about his post a while back — His site doesn’t seem to allow for comments — to point out his oversimplifications of the fair trade movement’s efforts:

***

Alex –

Thanks for drawing attention to the fair trade coffee debate. I do want to point out, though, that fair trade isn’t JUST about paying farmers better prices. If they were, I’d have to agree that FT could contribute to the current coffee glut problem. However, FT certification also requires farmers to work on improving the quality of their coffee — and as you know, specialty coffees fetch a fairly decent price for farmers, even on the free market.

Moreover, FT certification requires that farmers work on diversifying their crops, so that the farmers aren’t so susceptible to the fluctuating prices of a single cash crop. This means that FT in fact encourages farmers to grow LESS coffee, since they’re growing other stuff too, while improving the quality of the coffee they do grow.

To say that FT leads to “further oversupply in the market” is an unfair, and untrue, simplification of fair trade’s efforts and achievements.

***

Looking forward to reading more of your analysis on the issue –