FAIRTRADE IS GREAT

 

By Roger Cowe

Financial Times

Monday, March 4, 2002

 

Kwabena Ohemeng wants a higher price for his product. There is nothing unusual
in that - every company director would like customers to pay more. What is unusual
is that Mr Ohemeng is succeeding.

 

He is managing director of Kuapa Kokoo, a Ghanaian cocoa co-operative. And his
secret is that the customers are buying according to the principles of "fair trade".
They pay not only a guaranteed minimum that is well above the current, depressed,
market price but also a special premium for social development. And they offer a
long-term, direct relationship rather than the haphazard sales through a
middleman that are typical of commodity trading.

 

The Fairtrade movement has grown steadily since the early 1990s, mainly in
Europe but also in Japan and North America. While economists and trade and
development experts debate the rules of international trade and agonise over how
to combine open markets with a fair deal for poor farmers, a band of specialist
organisations has built a niche commodity market. A promotional Fairtrade
Fortnight began yesterday in the UK and Ireland.

The Max Havelaar Foundation blazed the trail in the Netherlands. It was set up in
1986 after coffee farmers in Mexico told development workers that they would prefer
trade to aid.

 

The Max Havelaar coffee brand was introduced in 1993, followed by honey two
years later and bananas, tea and orange juice by 2000. The brand is also sold in
14 other European countries and three outside Europe.

During the past decade, 16 other Fairtrade organisations have been set up.
Worldwide sales now amount to about E250m ($218m), the vast majority of which
is in Europe.

 

Cafedirect was launched in 1991. It has captured nearly 6 per cent of the UK
ground coffee market and has extended the brand into tea and instant coffee.
Unlike many European Fairtrade groups, which sell mainly through channels such
as charities, UK organisations have penetrated the conventional retail market.

Half a dozen brands are routinely available on supermarket shelves, while J.
Sainsbury and the Co-op have own-label Fairtrade ranges. Annual Fairtrade sales
in the UK are about £45m ($64m), having grown by 50 per cent last year.

The Day Chocolate Company, which markets Divine and Dubble bars, takes the
concept of fair trading a step further. Mr Ohemeng and one of his colleagues are
directors and their co-operative owns a third of the company, providing an insight
into northern consumer markets and some control over the products.

Mr Ohemeng says Fairtrade helps 40,000 farmers in almost 1,000 villages in his
co-operative. The premium, currently $150 a tonne, is divided three ways. The
farmers get a bonus, which can double their income; a slightly larger tranche is
used for training, to improve the crops; and about half the total goes on community
projects such as education, health and clean water.

 

"The farmers live in very poor conditions. They don't have good roads, clean water,
access to medical help and sanitation - the things you expect in the UK," Mr
Ohemeng says.

 

Fairtrade clearly makes a big difference for these small farmers but it is a tiny part
of the global trading system. Kuapa Kokoo claims to be the largest Fairtrade
organisation in the world. The co-operative accounts for 10 per cent of Ghana's
cocoa sales, which works out at about 1 per cent of world output. But only 2 per
cent of its sales are under Fairtrade terms. The rest is sold through the markets in
the normal way.

 

To make a real difference throughout the developing world, Fairtrade needs to
spread beyond niche products such as Cafedirect and Divine and be adopted by
mass market manufacturers such as Nestle and Cadbury.

Of course, the big companies insist that they operate ethically and offer fair terms
for their purchases. Starbucks, the much-criticised US chain, announced last year it
would start buying Fairtrade coffee for the US and followed last week with a similar
deal in the UK.

 

Starbucks buys 1 per cent of the global coffee crop, more than half of which is
purchased direct from growers. But the company is quick to damp hopes that
Fairtrade terms apply to all these purchases. While insisting that the UK deal was
more than public relations spin, it says: "The volume is not likely to be too
significant."

 

Still, it is a start. And it is more than the chocolate-makers are doing. A spokesman
for the Biscuit, Cake, Chocolate and Confectionery Alliance, an industry group, says
Fairtrade is not possible in the mass market.

"We are all in favour of the farmers getting a decent price. But the problem is that all
attempts to intervene through international agreements to shore up the price have
failed. We put an awful lot in to the cocoa economy through research and help to
deal with pests and disease. But working on a cost-plus basis like the Fairtrade
people is just not suitable for the mass market."

But how can Fairtrade products continue to compete and grow when they pay well
over the market rate for raw material but have to sell in a competitive market?

For example, Cafedirect pays 126 cents a pound for arabica beans, the minimum
internationally agreed Fairtrade price. That is almost three times the market price. It
sells at a slight premium to mainstream brands - but not enough to compensate
for that extra cost.

 

Cafedirect is protected by the fact that the mass market brands tend to take extra
profits and invest in marketing rather than drop prices but Penny Newman, the
Fairtrade company's managing director, acknowledges that the business model is
stretched when market prices are as low as they are now. She says it probably
could not work for the most price-sensitive products at the lower end of the price
scale. But her company makes a profit (about 2 per cent on sales) and pays a
small dividend to shareholders. The secret is in positioning its coffee as a
premium product.

 

"This is a limited company. First and foremost we are a business," she says. "After
all, how can Fairtrade work if we don't make a profit? We do it by demonstrating
added value. In part that is Fairtrade - but we also make sure that all the product
benefits are equal to or better than the competition. We have really fought to get
over the perception that Fairtrade equals poor quality."

Mr Ohemeng says consumers hold the key: "A bite of Fairtrade chocolate means a
lot to peasant farmers in the south. It opens the doors to development and gives
children access to [healthcare], education and a decent standard of living."