4.2.2.      The cost associated with
the operation of fair-trade system outweighs its benefits derived.   Recent research by
development economists Alain de Janvry and Betty Sadoulet at U.C. Berkeley and
Craig McIntosh at U.C. San Diego shows that when the world price of coffee
falls and the advantages of selling through fair-trade channels increase, more
borrowers choose to obtain fair-trade certification. But this reduces the
fraction of coffee that their cooperatives can sell at the fair-trade price.
What they found after examining 13 years of data from cooperatives in Guatemala
is that, on average, the economic benefits of participating in the fair-trade
system are offset by the price the growers have to pay for fair-trade
certification.                     Although
it seems too much of being an excellent idea, fair trade certification is not
without its critics. Obtaining a fair-trade certification is not free, it costs
between $2,000 and $4,000 in administrative fees alone, a sum that many of the
smallest farmers and producers could never hope to raise. This of course
excludes them from the programs, leaving those who need the benefits that fair
trade offers the most out in the cold.                                               Obtaining fair
trade certification is not the end of the potential difficulties new producers
face. Making the changes in their daily operations to ensure that they meet the
required sustainability standards can be a struggle, although it should be
noted that increasingly assistance is available in this area that allows the
smallest 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 greater
than any price benefit brought by the higher fair-trade price. Moreover, while
restrictions on growing practices might seem to meet worthy environmental and
social objectives, University of Wisconsin economist Brad Barham and
colleagues find that costs to growers imposed by these restrictions on fertilizers
and other inputs add to the production costs of impoverished growers, diminish
yields, and mitigate the benefits of free trade.

A frequently asked question about Fair Trade coffee is how much of the
retail price premium actually reaches the growers. Although many consumers
believe that farmers are significantly better off because of the higher prices
they get, a study by Mendoza (2000) has shown the opposite. Mendoza measured
prices along the supply chain for instant coffee produced in Nicaragua and sold
in the United Kingdom in 1996. His results suggest that farmers received a
premium 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 retail
premium— 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 Trade
price and the marketing margins were much larger. Zehner (2002) assesses the
distribution of the Fair Trade retail price premium for one pound of roasted
mild Arabica coffee sold in the United States in 2002.

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