Fair Trade Proving Anything But in Growing $6 Billion Market

Bloomberg  - Businessweek  January 04, 2012  By Simon Clark and Heather Walsh

Dec. 23 (Bloomberg) -- In a coffee-scented conference room near Lake Geneva, Ramon Esteve, a sixth-generation commodities trader, sits amid his father’s collection of centuries-old grinders and explains why he’s helping impoverished farmers grow more coffee, cotton and cocoa.

He’s embracing a goal, first laid out by fair-trade activists, so he can secure more sustainable supplies for his company and clients such as Nestle SA, the world’s largest food company, and Starbucks Corp., the biggest coffee-shop operator.

“For us it was survival,” said Esteve, 56, chairman of Pully, Switzerland-based Ecom Agroindustrial Corp., one of the largest coffee traders. “We’re not philanthropists. We’re businessmen.”

Esteve’s blunt acknowledgement shows how a mission-driven movement is transforming into a corporate push for productivity and profit. The cause begun in the 1980s by a Dutch priest and his activist-acolyte to help coffee farmers in the southern Mexican state of Oaxaca now includes some of the world’s biggest sellers of coffee (Nestle), lingerie (Limited Brands Inc.), chocolate (Kraft Foods Inc.’s Cadbury unit) and bananas (Wal- Mart Stores Inc.), to name a few.

Lucrative Label

New research has quantified the benefits to the bottom line: In a study released earlier this year, researchers at the Massachusetts Institute of Technology, Harvard University and the London School of Economics found they could boost bulk coffee sales by 10 percent just by adding a fair-trade label on the packages. Sales of goods approved by Fairtrade International, the world’s largest certifier of such products, soared 27 percent in 2010 to more than $5.7 billion.

The push to increase sales of goods deemed to be free of child labor and other practices has divided the movement, raised questions of whether going mainstream will undermine the cooperative farmers it was created to help and, most of all, strained the integrity of the certification systems that vouch for the fair-trade stamps that allow companies to charge consumers more.

“The fair-trade movement has profoundly lost its way,” said Aidan McQuade, who has advised Cadbury on cocoa buying as director of London-based Anti-Slavery International, a human rights organization founded in 1839. “Its focus on volume -- unless they have got all their systems in place to address fundamental issues like ethical trade, child labor and child slavery -- is problematic.”

Policing Trouble

The strains are evident in the work of Fairtrade International, a Bonn-based network of 25 organizations that certifies more than 100 products from cotton to gold around the globe. The labeling group approved cotton in a Burkina Faso program that Bloomberg News recently found is using child labor. That program supplies fiber to Limited Brands’ Victoria’s Secret division, which said it is investigating the issue.

Fairtrade also signed off on soccer balls made in Pakistan by suppliers that violated fair-trade standards, according to an International Labor Rights Forum report last year by the Washington-based nonprofit. Over the years, Fairtrade’s auditors have found breaches of standards in the industry that led to the suspension of certification until the necessary corrective action was taken, said Barbara Crowther, spokeswoman for the Fairtrade Foundation, a nonprofit that licenses use of the Fairtrade brand in the U.K.

Children Harvesting Cocoa

Fairtrade International took a year and a half to commission an independent review after BBC disclosures in March 2010 that children harvested Ghanaian cocoa certified by the group for suppliers to Cadbury and other companies, McQuade said.

“It has taken longer than we originally planned to get this underway,” Crowther said of the independent review, which she described as not just a response to the BBC report, but “an assessment of Fairtrade’s whole approach to tackling child labor in cocoa in the region.”

In a statement today, Fairtrade International said that as the organization has grown, “we have strengthened our certification systems and our global operations so that Fairtrade is more robust now than ever before.”

Still, the problems illustrate the difficulty in broadening the reach of ethical commerce.

Challenge of Mainstreaming

“To spread the benefits of fair trade we have to mainstream. It’s challenging, but we are determined to do that with integrity,” Crowther said. “We have done a huge amount to improve and strengthen and professionalize the certification system, and we are still working on it.”

The group’s struggles to police its own system come as the number of so-called ethical labels has mushroomed. The creation of 202 new ones in the past decade boosted the total tracked by Ecolabel Index to 424. That includes those created by companies, such as Starbucks’s own stamp for its producers, CAFE Practices.

The growth has thrown into question the very definition of fair trade and exposed rifts between the movement’s founders.

What evolved into Fairtrade International began in 1985 when the Dutch missionary priest, Frans van der Hoff, and a trade-campaigner friend, Nico Roozen, met in Utrecht in the Netherlands. In a local supermarket, they discussed how to bring coffee grown by Mexican cooperative farmers to consumers.

“Our coffee belongs on these shelves,” Roozen recalls van der Hoff telling him.

The pair developed a system where farmers were guaranteed a minimum price and a social premium to be used for projects such as health clinics and schools. They dubbed their label Max Havelaar, after the idealistic Dutch colonial officer in a 19th- century novel about the coffee trade.

Founding Fathers Split

Fairtrade International still uses their model, paying farmers premiums totaling 126 million euros ($164 million) from 2007 to 2010. Fairtrade estimates 1.15 million farmers and workers were in the system last year.

Today, van der Hoff and Roozen are at odds over how best to help producers amid the surge in demand for fair-trade goods.

“The two founding fathers of the movement are taking different positions,” said Roozen, 58, the son of a tulip farmer. “He is criticizing fair trade because it is making compromises with big companies like Nestle. And I am criticizing fair trade because they haven’t taken the lead in mainstreaming fair trade.”

Fair-Trade Alternative

Farmers must be trained to partner with major corporations so they can boost volume, said Roozen, director of the Dutch nonprofit Solidaridad. He works with Ecom, where Esteve’s chief adviser on sustainability issues, David Rosenberg, considers Roozen a mentor. They say they can offer farmers better prices and help in boosting yields without a formal fair-trade system.

Van der Hoff and his allies say corporations will offer those prices only until fair-trade cooperatives wither and die.

“It just ends in fair-washing and smokescreens,” said van der Hoff, 72, who still lives with the Oaxaca farmers he started helping three decades ago. “They are deceiving themselves.”

Fair trade is increasingly becoming a marketing strategy where the farmers’ poverty is a necessary ingredient to make consumers feel good about themselves, said Bill Fishbein, who founded Coffee Kids in 1988 to provide health and education services to poor coffee growers.

“We are way overpromising and under-delivering,” Fishbein said. “Those farmers have become a sales tool.”

Shared Value

Different companies use different language -- fair trade, sustainability, shared value. They say they’re working toward a similar goal: improving the quality of farmers’ products and lives.

Fairtrade International tries to ensure farmers more of a product’s final price by giving them a social premium.

“There is another way,” Harvard University Professor Michael Porter said in a debate at the World Economic Forum in Davos, Switzerland in January. “Why are farmers poor? Because they have lousy yields. Because the quality isn’t good enough, and therefore the prices are very low.”

Nestle announced a plan last year to double purchases of coffee from growers for its Nescafe brand to help guarantee supply and boost quality.

“We are trying to buy more coffee directly from farmers because then we can track where it comes from and give technical assistance,” said Nestle spokeswoman Melanie Kohli. “We want to build long-term trust.”

Ecom is expanding programs to help farmers improve their harvests because it has seen its supply base dwindle when growers don’t make enough money.

Taming the Coyotes

“What do you do to keep them on the land? You train them,” said Esteve, a Spanish national who was born in Dallas and lives in Switzerland. “These people could easily, easily double their yields by enrolling in these programs and following the best practices we are trying to promote.”

Esteve said he understands the concerns of Mexican farmers and advocates such as van der Hoff. In the 1990s, fewer growers were selling beans to Ecom’s buyers because they weren’t paid enough money by independent middlemen, known as coyotes, who were “probably a usurer in some cases,” he said.

To establish trust, Esteve said, he hired some of the coyotes and trained them as agronomists, who teach the science and economics of better crop production. Agronomists now outnumber traders at Ecom, whose Mexican unit, Agroindustrias Unidas de Mexico, is certified to buy and sell Fairtrade coffee.

Historic Change

The move to work directly with farmers is a historic change for Ecom. The founder of the family business, Jose Esteve Tomas, got out of textile production to become a cotton trader in Barcelona partly because employing people directly was too risky. The family started trading cotton in Barcelona in 1849 and still owns 92 percent of Ecom.

“Why mess with labor issues?” Esteve said of his ancestor’s thinking. “The riots in Spain in the 19th century were terrible.”

Esteve wouldn’t disclose a financial statement for the closely held company, though it has average annual sales of $2.7 billion, according to a document on the website of the World Bank’s International Finance Corp., which is considering lending Ecom $50 million to develop its services to farmers.

Like Nestle, which is based in Vevey a few miles from Ecom, Esteve said his company’s programs are too new to provide evidence that they’re helping farmers. Ecom is starting to compile information on its farmers and how they work.

Proving the Benefits

Surrounded by more than 100 coffee grinders dating to the 1600s, Esteve and Rosenberg sit in the conference room in Pully and describe the difficulty in proving their approach will help small-plot growers.

“It’s not a gimmick,” said Esteve, his glasses and wavy gray hair setting off a beige cardigan.

“But we can’t prove it,” adds Rosenberg.

The disagreement over how best to boost fair trade recently led to the departure of Fairtrade International’s U.S. affiliate. Paul Rice, an American who helped farmers during the Nicaraguan Sandinista revolution in the 1980s, wants his Fair Trade USA group to work much closer with large companies. He proposes certifying coffee grown on estates, rather than just on cooperatives.

“Many executives are realizing that old-school globalization, by which I mean going around the world looking for the cheapest labor and the lowest environmental standards, doesn’t work,” Rice said. “Their long-term financial success depends on sustainable supply chains, so there is no longer a trade-off between social responsibility and profitability.”

Isolating Farmers

Certifying larger coffee producers would cut small farmers off from international markets, said Merling Preza, president of the Latin American and Caribbean Coordinator of Small Fair Trade Producers, an association of cooperatives selling coffee, fruit and cocoa. Buyers will switch to larger, lower-cost farms able to invest in higher yields and deliver larger volumes than farmers who in some cases live on $2 a day, she said.

“When someone big competes against someone very small, what we say in Nicaragua is that it’s a competition between a tethered donkey and a loose tiger,” Preza said. “It’s a threat for everyone. It would distort the fair-trade system.”

The future of fair trade boils down to Roozen’s and van der Hoff’s rival visions. A test of their arguments can be measured in southern Mexico, birthplace of the fair-trade labeling movement and the center of its burgeoning organic-coffee production.

View from Chiapas

It’s here that Juan Carlos Lopez, 24, an adviser to the Café Guerrero Maya cooperative in Chiapas, said he can quantify the cost to farmers if big companies win the day. The difference between the market price for coffee and prices paid for Arabica beans by intermediaries buying for Ecom’s Mexico unit, known as Amsa, amount to at least 30 percent of a farming family’s revenue, he said.

“All they do is buy it cheap and sell it at a high price,” said Lopez, now an economics student at a university in Mexico City.

Lopez got his start in the coffee business on his father’s farm, wielding by age 8 a worn machete as long as his arm to clear weeds in the mountains of Chiapas. Sixteen years later, Lopez is on a mission to cut out the middlemen coyotes by linking his father’s cooperative to the fair-trade movement.

Café Guerrero Maya farmers are also beginning to eliminate the use of insecticides and weed killer, taking steps to avoid soil erosion and protect native plants and animals with the aim of becoming certified as organic growers, he said.

Finding Fresh Buyers

The cooperative found buyers this year in Mexico City who paid 72 pesos ($5.20) per kilogram after transport and processing costs, compared with about 50 pesos per kilogram in Chiapas. Lopez is skeptical that Amsa will aid producers in Chiapas, where for decades poor wages meant indigenous families lacked access to enough health care, food and schooling.

“They are looking for earnings,” he said in a phone interview from Mexico City, “not to provide for people’s needs.”

In an e-mailed response, Ecom officials said they wouldn’t have market share if they didn’t pay competitive coffee prices, which they publish daily at their Mexico mills. Greater productivity is key to helping coffee farmers in a country where three decades of fair trade has “apparently not lifted” many of them out of poverty, the statement said.

Some of the poorest towns in Mexico are located in the coffee-growing states of Veracruz, Oaxaca and Chiapas, the last a mountainous state known for the uprising there in 1994 of the Zapatista Army of National Liberation that protested the treatment of peasant farmers and indigenous groups.

Veracruz Protest

Farmers in white cowboy hats and baseball caps protested against traders earlier this month in the state of Veracruz. Hoisting signs that read “Coffee Growers Angry Over Price Abuse,” they said companies are inflating the costs that are subtracted from payments to growers.

For Lopez, whose family depends on coffee for its only cash income, cutting out middlemen like Esteve is key to improving living conditions in Chiapas.

“We have to find the best profit, which is through selling directly to the consumer and not some intermediary that pays whatever price they want,” he said.

His family and the more than 200 other indigenous producers who make up the Café Guerrero Maya cooperative aim to sell fair- trade coffee overseas at higher prices -- and, one day, challenge the Esteves with a producer-owned supply system featuring a chain of shops modeled after fair trade that would sell coffee beans purchased directly from farmers.

Alternative to Fields

Such moves could transform lives otherwise spent toiling in the fields, said Lopez, the first in his family to go to college and one of the few of his neighbors to make it past elementary school.

“It might mean not having kids work, and sending them to school instead,” he said. “They could have breakfast, shoes, whatever they need.”

Perhaps even the chance to go all the way to Mexico City to study a better way of selling coffee.

--With assistance from Marvin G. Perez in New York. Editors: Flynn McRoberts, Melissa Pozsgay

To contact the reporters on this story: Simon Clark in London at sclark4@bloomberg.net Heather Walsh in Bogota at hlwalsh@bloomberg.net

To contact the editors responsible for this story: Flynn McRoberts at fmcroberts1@bloomberg.net Melissa Pozsgay at mpozsgay@bloomberg.net