catapult magazine

Is smaller always better?

by Chad Vandervalk

There was a time when families worked on small plots of land. They grew most of their food themselves, and sold the excess at small town farmer’s markets. There was a time that seemed simpler, less complex, less commercial. A time with small town main streets that still had a local butcher, baker, and hardware store. A time when people knew their neighbors and closed the day sitting on the front porch talking to one another.

At least, this is the image that many of us have of the “good old days.”

The truth is, it was never so idyllic. Sure farms are a lot bigger now, and a lot more commercial, but that is not necessarily a bad thing. We would not be able to support our huge industrial and population growth without these changes in agriculture. The problem is, many people still have this love affair with the small — an affair that impacts our judgment in ways we have not fully examined.

Is smaller always better?

Fair trade has become a major issue in the last couple of decades and is something that raises the temperature of any discussion. This is especially true of fair trade coffee. Essentially, the fair trade movement is a way for wealthy westerners to ease their consciences and help a few localized individuals or families in the poorer areas of the world, but that help often causes more problems than it solves. Overall, fair trade coffee is an insufficient economic and development move.

The first thing we have to realise is that coffee is a complicated market, in both its production and consumption. Since coffee can only be grown in certain climates and at certain elevations, coffee production in the world is mostly in poorer and less developed nations. Since world demand for coffee remains rather constant regardless of price, the demand for coffee is very inelastic, leading to highly erratic coffee prices. As supplies fluctuate because of weather conditions, price can vary wildly. Production in a good year can be ten times as high as that in a poor year but since demand does not increase that much as prices fall, a good crop year for coffee growers causes a sharp drop in the price as the market attempts to clear out the extra supply.

Douglas Murray, Laura Reynolds and Peter Taylor in “The future of Fair Trade coffee: dilemmas facing Latin America’s small-scale producers” in Development in Practice, (April 2006) note, “World coffee prices languish at an almost 100-year low due to deregulation-driven overproduction and cost-cutting technological innovations in coffee processing.” This 100-year low for coffee prices has dealt a devastating blow to the communities which rely on the production of coffee and has raised much awareness to their plight. Such awareness has lead many people in the rich areas of the world to want to do something for the people, quite naturally. Some have mistakenly placed the blame for the low coffee prices on the trade practices of the market, and are urging that some sort of fair trade system be put in place of the current free trade system. The problem, however, lies mostly in overproduction, not in the trade system.

The romanticized view of the family farm in the first world is played out in the fair trade system by its favoring these types of farms. This love affair can be seen in the U.S. and Europe as well, where the government spends millions of dollars protecting their own family farms at the expense of those of the rest of the world. Comparing the origin of the number of dollars that the farmer receives at the farm gate may shock you. Roughly 60% of the average income of a farmer in Europe is due directly to government intervention, due to the Common Agricultural Policy. In the U.S. it is a little under 40%. In Canada it is less than 20%. How can a farm in Canada compete with a farmer in Europe, or the U.S., when it is already behind 20-40%? How can a farm in Brazil compete? This love affair with protecting the family farm has caused worldwide overproduction of many agricultural goods, and now it is being extended to coffee production.

The goals of fair trade are laudable, and something I wholeheartedly agree with. Anil Hira and Jared Ferrie in their article “Fair Trade: Three Key Challenges for Reaching the Mainstream” in the Journal for Business Ethics (2006) define fair trade as a “movement establishing alternative trading organizations to ensure maximal returns, safe working conditions, and environmentally sustainable production.” The method that fair trade uses to achieve these goals, however, helps a few at the expense of many.

I will concede that some coffee co-operatives associated with fair trade have been able to better their circumstances. Gautier Pirotte, Geoffrey Pleyers and Marc Poncelet in “Fair-trade coffee in Nicaragua and Tanzania: a comparison” in Development in Practice (August 2006) note that “although the volume of fair trade exports remains rather limited, it is important to the small producers involved, partly softening the effects of the crisis by maintaining and supporting the continuation of some economic activity in areas devastated by the fall in coffee prices. In this way fair trade indirectly benefits the whole rural community, as the profits are re-invested in the local economy.”

It is good that these small communities are helped and that their economy is boosted, but fair trade coffee is not the best way to achieve this success. This is because the system of fair trade places too many restrictions on the market system that interfere with price signals, and cause continual overproduction of coffee, the very thing leading to the low price of coffee in the first place. Sarah Lyon outlines three requirements coffee producers must meet to be involved in the fair trade system in “Evaluating fair trade consumption: politics, defetishization, and producer participation” in International Journal of Consumer Studies (September 2006): “First, they must be small family farmers. Second, they must be organised into independent, democratic associations. And, third, they must pursue recently elaborated ecological goals.” The fair trade movement has dictated the structure of the farms that it is willing to help. This determination of the structure of the farms that fair trade organizations are willing to work with has actually had little impact on those who are the worst off in these communities. Hira and Ferrie point out that “most coffee is grown on large estates, filled with landless workers who are much worse off than small landowners.”

Here’s the deal. In the large scheme of things, fair trade production makes things worse. A freely operating market uses price signals to indicate the most efficient allocation of resources in a society. If there is too much of something being produced, too many scarce resources are being allocated to a certain commodity. This causes the price of that good to go down, decreasing the incentive to produce that commodity. This continues until a balance is reached. When markets are interfered with, as with fair trade, the price signals do not reach the producer and goods are produced which no one wants to buy leading to further oversupply. Remember, the price for coffee is so low because there is an oversupply. The market is trying to tell people to stop placing their resources into producing a commodity for which the demand is insufficient. Fair trade guarantees a base price for coffee, one that encourages people to produce the commodity. The increased production and marketing of fair trade coffee will increase the supply of coffee on the market and decrease the demand for conventional coffee even farther, causing prices to continue to fall.

This may not sound that bad yet. So what if more coffee is produced and larger farms get a lower price for their good? Well, since most coffee is produced on large landholdings that employ large numbers of extremely poor landless people, the further decrease in price will cause these landowners to lay off more of these extremely poor people, making the crisis worse. Pirotte, et al write, “In Nicaragua we found that when fair trade focuses on small-scale producers, it fails to reach the poorest sector of the population, namely the unemployed coffee-plantation workers, who have been laid off in their hundreds by large plantation owners following the fall in coffee prices.” They also noted that these seasonal landless workers are not helped by the fair trade movement. “[E]ven when they are working for fair-trade producers, their income and working conditions have not improved, despite the principles underpinning fair trade.” So, the fair trade system, which helps a few family-sized farms, actually harms the poorest people within the coffee industry.

Why, then, is there such an attraction to fair trade? Lyon notes that increasing numbers of scholars “describe fair trade as a system that emphasises mono-cultural production for export in which third world producers serve the purposes of first world luxury consumption.” In essence, the purchasing of fair trade coffee does more to ease the conscience of those who purchase it than it does to better the condition of the poor individuals working in coffee production.

I do not want you to get the impression that there is nothing we can do to make the coffee industry more beneficial for the poor people who work in it. One thing people could do, would be to help poorer coffee farmers band together in some form (co-operatives, partnerships, etc.) and develop further processing facilities. There is a market within the first world for luxury goods and the importation of good quality coffee which is grown and processed by a single small group of producers would fit a niche market which has not been accessed. Assisting farmers to process more of their own product allows them to recapture more of the gains of production. This provides a way to provide the producer with a larger amount of the final retail price, without propping it up in an artificial manner. Another, and perhaps a better way, is to help these farmers diversify their operations. Many of these areas are in crisis because they rely solely on the coffee industry for their livelihood. Encouraging and assisting these people to obtain training and or materials for other industries would have a much richer and more lasting impact on these communities. Essentially, we need to focus on more holistic development rather than easing our consciences by purchasing fair trade coffee.

So, though the fair trade system has had a positive impact in some localised areas and for a few individual families it is a poor way to achieve the development and advancement of the people abandoned by the coffee industry.  Not only does it not help the poorest people in the industry, it could actually cause further harm. In this case, smaller is not necessarily better.