4.2.2. The cost associated withthe operation of fair-trade system outweighs its benefits derived. Recent research bydevelopment economists Alain de Janvry and Betty Sadoulet at U.
C. Berkeley andCraig McIntosh at U.C. San Diego shows that when the world price of coffeefalls and the advantages of selling through fair-trade channels increase, moreborrowers choose to obtain fair-trade certification. But this reduces thefraction of coffee that their cooperatives can sell at the fair-trade price.
What they found after examining 13 years of data from cooperatives in Guatemalais that, on average, the economic benefits of participating in the fair-tradesystem are offset by the price the growers have to pay for fair-tradecertification. Althoughit seems too much of being an excellent idea, fair trade certification is notwithout its critics. Obtaining a fair-trade certification is not free, it costsbetween $2,000 and $4,000 in administrative fees alone, a sum that many of thesmallest farmers and producers could never hope to raise. This of courseexcludes them from the programs, leaving those who need the benefits that fairtrade offers the most out in the cold. Obtaining fairtrade certification is not the end of the potential difficulties new producersface.
Making the changes in their daily operations to ensure that they meet therequired sustainability standards can be a struggle, although it should benoted that increasingly assistance is available in this area that allows thesmallest producers to keep their goods up to scratch. Therefore,Fair trade imposes significant costs on impoverished growers. The University of California study estimates that fair-trade certification costs about$0.03 per pound. This doesn’t sound like much, but in some years it is greaterthan any price benefit brought by the higher fair-trade price. Moreover, whilerestrictions on growing practices might seem to meet worthy environmental andsocial objectives, University of Wisconsin economist Brad Barham andcolleagues find that costs to growers imposed by these restrictions on fertilizersand other inputs add to the production costs of impoverished growers, diminishyields, and mitigate the benefits of free trade.A frequently asked question about Fair Trade coffee is how much of theretail price premium actually reaches the growers.
Although many consumersbelieve that farmers are significantly better off because of the higher pricesthey get, a study by Mendoza (2000) has shown the opposite. Mendoza measuredprices along the supply chain for instant coffee produced in Nicaragua and soldin the United Kingdom in 1996. His results suggest that farmers received apremium of only US$0.09 per pound, or 2 percent of the US$4.23 retail premium.The UK distribution system absorbed the largest single fraction of the retailpremium— US$1.54, or 36 percent. Since the Mendoza study uses data from 1996,the results may well underestimate current Fair Trade benefits for farmers,since the world coffee price was then much closer to the guaranteed Fair Tradeprice and the marketing margins were much larger.
Zehner (2002) assesses thedistribution of the Fair Trade retail price premium for one pound of roastedmild Arabica coffee sold in the United States in 2002.