Fairtrade and Market Efficiency: Fairtrade-Labeled Coffee in the Swedish Coffee Market

Dick Durevall

doi:10.3390/economies8020030

Abstract

Fairtrade labeling has the potential to increase market efficiency by connecting farmers to altruistic consumers who are willing to pay a premium for sustainability-certified products. A requirement for increased efficiency, though, is that the farmers’ benefits are larger than the Fairtrade processing costs and the excess payment by consumers that does not accrue to farmers; otherwise direct transfers to farmers would be more efficient. This paper analyzes how excess payment for Fairtrade-labeled coffee is distributed in the Swedish market, using information on production costs and scanner data on almost all roasted and ground coffee products sold by retailers. A key finding is that roasters and retailers get 61–70%, while producer countries, in this paper comprising coffee farmers, cooperatives, middlemen, exporters, and Fairtrade International, get 24–31%; Fairtrade Sweden gets 6–8%. These values are the upper and lower bounds that reflect assumptions made about the additional costs of producing roasted and ground Fairtrade coffee, given the cost of beans and the Fairtrade license. The Fairtrade label thus seems to create a coffee product that roasters and retailers can use to exploit their market power.

Highlights

Fairtrade certification is a market-based policy instrument aimed to reduce poverty (Fairtrade International 2019)
The analysis provides an estimate of the size of the price-cost margin on Fairtrade coffee using conventional coffee as the benchmark, so there is no need for information about the costs of producing roasted coffee in general, except for the costs of beans
The share going to Fairtrade Sweden is 8% in the first case and 6% in the second case

Summary

Introduction

Fairtrade certification is a market-based policy instrument aimed to reduce poverty (Fairtrade International 2019). As sales of Fairtrade-certified goods are increasing rapidly (Fairtrade International 2017a), a key question is whether Fairtrade labeling improves market efficiency and welfare or if charity works better, as argued by Weber (2007), Griffiths (2014), Claar and Haight (2015), and De Janvry et al (2015), among others. Fair trade certification can be viewed as creating a new product (e.g., coffee combined with (perceived) decent incomes and working conditions for poor farmers), that consumers are willing to buy (Reinstein and Song 2012; Dragusanu et al 2014). The label and the subsequent monitoring (and a presumed positive effect on producers), the market for fair trade products would not exist. The term Fairtrade refers to products certified by Fairtrade International. I use the term fair trade when referring to fair trade programmes in general

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