Fair Trade Minimum Price: A Comparative Analysis for the Arabica Coffee Market

Abstract

Aims: This paper analyses the validity of the fixed Minimum Price approach used by Fair Trade Movement (FTM). It focuses on coffee, from the Brazilian state of Minas Gerais, where the majority of FTM Arabica coffee is produced. Two main organizations operate worldwide: Fairtrade Labeling Organizations (FLO) and World Fair Trade Organization (WFTO), but only the first one has a worldwide recognized certification process. Preamble: The most important conditions are: i) a worldwide Minimum Price, fixed since 2011 at US$ 1.35/pound (Arabica natural and non-organic); ii) a premium of at least US$ 0.20/pound for the organization (1/5 for productivity and quality improvement, and 4/5 for community projects). Episodes of side selling have been reported and the validity of the Minimum Price approach is at risk. Methodology and Duration of Study: This paper uses four sets of data: the local production costs in Reais (January 2012 to October 2016), the international price in US$, the FTM international price and the local price (April 2011 to October 2016). All data were converted into Reais, for one 60 kg bag. Results: In April 2011 – October 2012 and August - October 2014, the FTM price was lower than the price paid by other buyers. The production cost was higher than the FTM price from February 2012 to October 2015. These two results partially justify the behavior of some farmers, who in these periods side sold their coffee, unless their organization used some reserves to cover the difference. Conclusion: Two approaches are suggested: a) to educate better all FTM producers about the long term purposes of the system, b) to abandon the worldwide fixed price in US$ and apply a flexible formula incorporating the production cost in local currency. Further research, for the coffee in other areas and for other commodities is also suggested.