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Unfair Trade in Belize - How Kraft Shafts Cocoa Farmers

FAQ: Do Fair Trade certified cacao farmers reliably earn more money than cacao farmers who are not Fair Trade Certified and reliably benefit from increased world market prices?


Answer: Probably not.

What? How can this be? A hint at the true nature of how "fair" Fair Trade is can be found in the FAQ on the TransFair USA web site. Many people believe that Fair Trade benefits farmers directly. However, you have to go to the Advanced FAQs page to learn that individual farmers don't benefit directly, though this is not how Fair Trade is understood by the general public. Fair Trade premiums are paid to farmer co-ops who deduct a variety of operating expenses (including certification costs - which are not directly mentioned and are bundled into "administrative costs") from the premium paid. Thus it is quite likely - almost certain - that the average individual cocoa farmer receives little to no actual direct benefit from Fair Trade certification.

Let's do some math. Say that the Toledo Cacao Growers Association sold 40 tonnes of cocoa to Green and Black's (previously bought by Cadbury which was just purchased by Kraft) in 2009. Now Green and Black's tries to do the right thing and pays the entire Fair Trade premium ($150/tonne) irrespective of world market price, even though they are allowed to reduce the premium they pay as the world market price goes up. 

This means that the maximum Fair Trade premium on 40 tonnes in 2009 would have been US$6000 (or Bz$12,000). From this amount it's prudent to account for and deduct all of the costs associated with attaining and maintaining Fair Trade certification. I was unable to discover what those are at the TCGA, but for argument's sake let's say they run to 8% to make the math easy, or just under Bz$1000 (they are likely far higher).

At the moment, there are nearly 900 active farmers in the TCGA. If the remaining premium (Bz$11,000) got distributed evenly it would mean that each farmer would receive about Bz$12 (or US$6) extra annually for their work. Fifty cents a month. More likely, the premium distribution is pro-rated according to how much cocoa gets contributed so some farmers will get more - while most get less - and the actual percentage of the premium available to be paid out is lower because overhead costs are much higher than 8%.

And this US$6 average per farmer figure is only because Green and Black's pays the maximum Fair Trade premium irrespective of market price.

How is this Fair?

One of the underlying fallacies of the whole Fair Trade pricing and premium structure is the assumption that, as the world price for an agricultural commodity (e.g., cocoa) increases, farmers automatically get paid more. In fact, this is not often the case because farmers are insulated from market prices through a variety of layers and mechanisms. In Grenada, the Grenada Cocoa Association sets the price, and it does not have to (and does not) reflect market prices as the quality of its cocoa is so high and the amount produced so low that it commands a premium over world market prices often exceeding US$1000/tonne. In Belize, the price paid to the TCGA (and therefore the price the TCGA pays to its farmer members) is based on a 5-year rolling average of the world market price. This rolling average protects Green and Black's from price volatility - at the expense of the farmer.

To be fair, Green and Black's does bring value to the TCGA and to its member farmers by providing a guaranteed market. Guaranteed markets are hard to find in the world and its presence in and around Punta Gorda has benefited farmers in the area immensely because they know they have a buyer for what they produce. However, the guaranteed market is a benefit Green and Black's offers and is not an intrinsic benefit of Fair Trade. In fact, a portion of this guaranteed market is about to go away as the new owners (Kraft) are shifting production from Italy to Canada requiring different organic certification and the TCGA will no longer be purchasing transitional cacao (cacao from farms in the process -which takes up to three years - of being certified organic).

The point to make here is not that Fair Trade is bad, but to acknowledge that while its aims are noble it is part of a solution, and not the solution. It is important to remember that Fair Trade is a business. And while that business demands transparency and accountability from its member organizations all the way down to the farmer co-ops it certifies, as a business it does not demand the same accountability and transparency of itself.

Because of the nature of reporting required to achieve and maintain certification, I challenge FLO and ALL of the member organizations to publish, annually, a clear and detailed accounting of:

-) how the premium that gets paid varies based on changes in world prices
-) the premiums paid out to farmer co-ops by commodity, by country
-) the amount, by commodity, by country, of the certification and re-certification fees collected from farmer co-ops
-) the number of member co-ops, by commodity, by country
-) the fees collected from companies paying to license various Fair Trade logos
-) operating budgets, including salaries of all senior executives
-) the number of field personnel directly involved in certification along with detailed calendars and itineraries of time spent on certification activities including hard costs (e.g., salaries and travel expenses)

In other words, is Fair Trade as a business run well? As of the 2008-2009 Annual Report there were 746 producer organizations across all commodities in 59 countries with over 2700 companies making over 6000 licensed products worldwide. Is it cost-effective at delivering on its goals? Does the rhetoric of Fair Trade match the reality? Is Fair Trade effective? The total amount of Fair Trade cocoa produced in 2008 was 10,299 tonnes from a total harvest of over 3,000,000 - or about one-third of one percent. 

If Fair Trade works so well, how come more cacao farmers aren't certified?

The simple answer is - they can't afford it.

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I would want to also ask them why I can't use the phrase "Fairtrade sugar" in my list of ingredients ont he back of a wrapper after paying the premium? Oh - I have to pay the premium AND pay the organisation? Now I understand....
Duffy
Red Star Chocolate Ltd
Great post and great analysis, thanks Clay.
Clay's intriguing analysis of this problem begs the question of whether there is genuinely any such thing as "fair trade" cacao, or if this noble term accurately applies to any other product involving physical labor (bananas, coffee, sugar, etc.) for that matter. During the Chocolate Retreat in Belize that I attended with him from 2/20-27/10, he referred to at least one cacao distributor who engages in "direct trade" which sounded far more preferable to the bureaucracy and red tape instrinsic to officially labeled "Fair Trade" cacao. If the U.S. Commerce Dept. and the Trade Representative specifically would take concrete action on this human rights issue, then caveat emptor would not be an essential principle for ethical consumerism to thrive among progressively minded activists who want to enjoy these products without being complicit in international human rights abuses. My practical advice to Clay regarding this article is to directly contact Arianna Huffington & ask her to post this article to the Huffington Post at www.huffingtonpost.com, or accept his submission with links included as reference points. Many more millions of politically interested citizens will be alerted to this critical problem on that site and simultaneously attract more readers to this Chocolate site as well. This subject belongs in the HP Green section will I know her staff will welcome this discussion with open arms.
David - very interesting suggestion. This is just a part of a larger picture I want to draw that includes my recent experiences in Bolivia and Grenada. When I get done I will definitely follow up. Thanks!

:: Clay
As once a member of Fair Trade for coffee I found that it does not make a difference in quality of the product and in fact the farmers only receive a small and I mean very small percent. Ask the Fair Trade Org to show you their financial output and you will be banished from their membership. Not really but you will never receive what you ask for! I do believe in assisting these farmers in making more profit but not by using several middleman companies that take most off the top. I actually question what true organic really is. If by the time you receive your product is it still considered organic? Fumes from the cargo area are absorbed by a lot of products. Organic label does not eliminate the entire use of fertilizers but will allow a low % of various types. This is what I have read under guidelines for declaring organic food. Maybe cacao is different, to new in the biz to know really. I do know the farmers deserve better and would be better off dealing direct.
This is good Clay. I've been speaking about this very subject at lectures for several years now and people are generally shocked to learn the details. This issue is quite complicated. You've gone into some detail here with figures that I appreciate.

I often had customers in my shop who asked whether I carried fair-trade chocolate (and/or organic) and I spoke to them about this subject. Most people would accept my explanation and buy chocolate but some people would not buy unless it had the fair-trade label.

I've never gotten a straight answer from reps from the fair-trade or other companies involved with this issue (rainforest alliance is difficult at best...).

I agree with David that you might consider contacting Huffington on this.

There are plenty of great and wonderful chocolate makers (bean to bar) that deal directly with growers and pay way above not only market but fair-trade too. Some are contactable on this site.

Thanks and I look forward to the follow through...

-Mark
Read my new post on this topic: Unfair Trade: Is FairTrade Scalable?.

For my alternative approach to FairTrade, visit 5percent4farmers.
Hidden in plain sight in the 2008 TransFair USA annual report is an indication of just how different the perception of "FairTrade" is from reality.

On page 19, the following numbers are presented in huge type:

160,000 farmers impacted
$200,000 granted to producer organizations

Not sure whether that's outright grants or premiums, but US$1.25 per farmer doesn't sound like a whole lot, does it?

The 2008 Audited Financials (click to download 2008_TFUSA_Audited_Finan... make for some interesting reading - you get a fair sense of where money comes in and where it goes. For example, rent on the Oakland HQ in 2008 was over $500,000. Having visited the TCGA offices in Punta Gorda I can assure you that their rent is a lot less.
You nailed this one on it's head. Thanks Clay.

Cotton Tree Chocolate also buys beans from TCGA and has no problem with paying for the Fair Trade premium for the beans. Because Cotton Tree Chocolate is such a small company, the costs to get Fair Trade certification on the packaging were prohibitive. Cotton Tree Chocolate and Sustainable Harvest International work together towards making a more sustainable living for these farmers. These beans are not exported to be processed elsewhere. The ingredients for Cotton Tree Chocolate come from Belize. Locals are hired to make chocolate in the very same town as TCGA. Cotton Tree Chocolate is produced and sold only in Belize and works to create a better living for the people of Belize.

The Fair Trade labeling requirements favor larger chocolate making companies with deeper pockets without looking at how much is actually being done to help the local community and it's farmers.
Brian:

Your experiences are valuable and valued and I am glad you shared them. I think each of us has something that we're "expert" at - I just happen to very open to sharing my experiences and what I've synthesized from them.

You are so right - the system that seems to make so much sense to consumers in "developed" nations doesn't make a whole lot of sense to farmers in "undeveloped" areas of the world when they learn of the benefits for the work required to earn them.

Consumers (especially here in the US) have to learn that inexpensive food is not a birthright, and shareholders in companies need to reward corporate social responsibility (CSR) programs that deliver tangible value and aren't just greenwashing.
Clay,

I'm very familiar with the situation with the specific co-op and at least generally familiar with how Fair Trade operates. If you rely on your numbers and figure out the financial impact of each farmer on a percentage basis, you would see that each farmer on average earns an extra 5% from being Fair Trade certified. The fact that the nominal amount is a pittance is another story. Not sure you could really consider that 900 farmers in the coop are actively producing. If so, the average farmer produces less than 100 pounds of beans a year. My guess is that only a third are active so the financial impact is threefold.

As you acknowledged, the Toledo Cacao Grower's Association (TCGA) is a market maker. Without them, farmers would have no one to sell to. Who would spend the time aggregating the crops of hundreds of farmers and arranging for shipment to an international buyer if not the TCGA? These farmers are Fair Trade certified because it is part of the marketing of Green & Black's Chocolate (TCGA's primary buyer) and therefore a requirement of the product.

If you think about it from this perspective, it's almost like a union job. Sure, some unions may waste their member's money, but the member has a job that otherwise wouldn't be available. In this case the farmer is better off selling a Fair Trade product than not selling at all.

I do agree that the amounts charged by the Fair Trade Labeling Organizations are exorbitant; a direct trade model makes more sense. Perhaps if Green & Black's/Kraft and the TCGA gave up on Fair Trade labeling, each entity could pass that much more on to the farmers.

Jeff
Jeff -

You make some very good points about the role of a co-op like TCGA and how it can be pivotal to the growth and development of a community. However, the TCGA's role as a market maker is unusual, if not unique, because the TCGA has a guaranteed buyer. This is not the case for all FT co-ops. There is a downside to the guarantee, however, as the contract with G&B contains a multi-year rolling average provision to reduce volatility. It doesn't benefit the farmers because the FT contract already contains a minimum price provision. The beneficiary is the buyer who was insulated from the recent price surge.

The larger point I am trying to make is that the reality of Fair Trade - on the ground to farmers and their families - is a far different from that portrayed by FLO. Many people still believe that when they buy Fair Trade that money goes directly to farmers.

As I have maintained all along, FT is a part of a solution, not the solution, and that alternatives need to be considered. A Direct Trade model (like the one we've been mooting over at 5percent4farmers.ning.com) makes a lot more sense because of the inherent transparency.

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