Wednesday, April 13, 2011

Coffee Part II - "It's not my Problem"

This is the second of a three part series on my findings in Aceh, Indonesia. First, I examined a failure in the Fair Trade system and the "negative implications" it has on farmer cooperatives. In this post, I will examine a recent case presenting the cooperative perspective of their dealings with a Fair Trade coffee importer and based on that, explore ways for Fair Traders to keep the system in check. In Part III, I will present how I worked with the cooperative to create positive and sustainable solutions.

Disclaimer: for legal purposes, the name of a particular Fair Trade Coffee importer has been removed from the post below.

I must admit that I had always been under the naïve assumption that Fair Traders did not speculate on market prices. Why did I hold this assumption? I believed that as Fair Trade certified coffee importers they sought to be fair and understood the historic and current issues faced by coffee cooperatives and small producer groups. Fair Traders have principles that are far above the conventional traders! Not only that, they are certified as Fair Trade, and in that certification they have our trust! 

Much to my surprise, when I met with a Fair Trade exporter and later with an organic Fair Trade certified cooperative in Aceh, I learned of a case that I would have expected from a conventional trader, not a Fair Trader. Sadly enough, it is not an isolated case.

This blog post is dedicated to the Fair Trade importer who cost a coffee cooperative in Aceh tens of thousands of dollars. He is also the author of a rather blunt statement I heard repeated to me as his response to a request for dialogue from the cooperative:

"It's not my Problem"

On their website, a particular importer in question, based in USA, appears to embrace the principle of long-term relationships. However, what I discovered was quite the contrary. 

With that stated, I would like to reiterate the purpose of my research and blog: This blog is the story of a journey with a purpose; a journey to present the voices of Fair Trade producers, artisans, weavers, farmers, and craftswomen and men. All too often the voices of producers are drowned out when it comes time for their voice to be heard. 

This post is committed to giving a cooperative's side of the story that was fact checked locally.

Current conventional market coffee prices are quite high. So high, as a matter of fact, that FLO-Cert has had to raise the minimum pricing standards from US$1.25/lbs to US$1.45/lbs. (for kg, multiply by 2.2) Other value-added payments such as organic certification were also increased. Perhaps the time for coffee farmers has come around!

Ready-for-export organic coffee from the
Tunas Indah Cooperative in Aceh.
When I met with FLO-Certified Arvis Coffee Exporters in Medan, I spoke with owner and Director, Mr. Sadarsah about my research. Firstly, I wanted to inquire of his experiences in Fair Trade; and secondly, I was in search of Fair Trade cooperatives in Indonesia. Immediately he introduced me to a couple cooperatives and put me in touch with a terrific translator in Aceh who was quite knowledgeable about Fair Trade, Mr Faisal.

Next, I began to inquire about his dealings with Fair Trade importers. Much to my surprise he immediately responded, "There is a lot of speculation on the Fair Trade coffee market." 

But how could this be? A Fair Trade speculator? I honestly didn't get it. Then I thought to myself, "Ok, so a guy speculates and secures a price - a Fair Trade price. What is wrong with that? The farmers still get a Fair Trade price regardless."

Mr. Sadarsah explained to me that it is an increasingly common practice for Fair Trade coffee importers to contract a quantity and lock in a price three to four months ahead of harvest time. So far I could see no wrong in this, so I continued to listen. 

He presented me with a case of one importer. In July, 2010, an importer had made a contract with Arvis Coffee to buy three containers of Organic, Fair Trade coffee. The harvest season is in October, and in turn Mr. Sadarsah contracted with Tunas Indah Coffee Cooperative to fulfill the order. The contracted price was US$4.50 per kg of ready-for export Arabica green bean. Mr. Sadarsah requested a prepayment from the importer on behalf of Tunas Indah Cooperative, and was told that it was not possible. No reasons or rationale was offered; no negotiations. Simply, "Not possible." Within a week the conventional market prices began to rise. 

To provide context to the story, when I inquired about some of the problems cooperatives faced, one repeated mentioned was a lack of capital. Capital was needed to 1) pay farmers for their coffee beans on delivery; and 2) to value-add by further processing the beans locally which they can sell to the exporter as export-ready with only a 12% moisture content versus an 18% that is normally presented to an exporter, who then has to hire workers to separate and dry them further. 
Coffee drying done locally in Takengon, employing local
community members with a "living wage." An example of
promoting Fair Trade through local employment opportunities

Again, referring to Part I of this series, in her publication, Coffee, Co-operatives and Competition: The Impact of Fair Trade, if Anna Milford had evaluated the "negative implications" of not receiving a prepayment, she would have easily seen that there are lost income generating opportunities for a community when a prepayment is not given. It is not simply an inconvenience for farmers to have to wait for payment as Milford claims.  

Additionally, I have found that by involving communities in value-added local processing it will greatly increase a local communities knowledge of Fair Trade by experience in the system. After all, another principle of Fair Trade is to promote Fair Trade, and what better way to do that than to offer income generating opportunity! More about this and the future of Fair Trade in Part III of this series!

Whether a prepayment is requested or obligatory is not the issue. Within the context of Fair Trade, the onus to provide a prepayment should be on the importer, not on the producer. There is a power imbalance that needs to be addressed - especially when all the initial costs are taken by Southern producer cooperatives. That is the purpose of having a principle in the first place.

Back to the Findings: The problem for the cooperative was in fulfilling the contract made in July, 2010. The harvest came in October, 2010, and the conventional market prices were at US$7.00/kg, which is much higher than the contracted price US$4.50/kg. This put the cooperative in a difficult position. 

From the cooperative's perspective, it will lose credibility with its members if there is no sale to any importer, and this was the one deal they had secured.

Secondly, if the cooperative offers only US$4.50/kg when the local market price is US$7.00/kg, the members will sell their organic green Arabica beans on the conventional market for $7.00/kg where it is mixed in with whatever else came in the door. Furthermore, why retain membership in a cooperative that doesn't sell your product? The cooperative faced a suddenly stark possibility - with no members, how could it continue to function? 

Directly stated, the cooperative's very survival is suddenly at stake. Understand that the income generation for the cooperative itself is from this transaction from farmer to exporter who in turn ships to the importer. The cooperative is the voice and union of the individual farmers, but where it generates much needed income is with value added activities.

Answer me this, would you willingly buy at $7.00/kg from cooperative members, process the beans to be export ready, and sell at $4.50? Obviously not, so the cooperative and the exporter went to the importer to renegotiate the contract. 

Let's review the possible outcome from a renegotiation: 

A) the price is renegotiated to the current market value and the cooperative can value-add by processing it locally, employing local members of the community, and send to the exporter soon afterwards. On the other hand, while the importer is concerned about his profit margin in this lucrative commodity, when the market price goes up on this end, undoubtedly it goes up on the other end as well. So it is not that the coffee importer will lose money by increasing the contract price to the current market level. I would be very surprised if the importer made contracts with Fair Trade roasters locking in a July price, but if this was the case, this price can be renegotiated as these are Fair Trade roasters with a social conscious, or so we hope.

B) the importer is reluctant to come to the table for renegotiation, but in the end, does so and agrees to split the loss with the cooperative (although the importer doesn't really lose here because his sale prices have gone up with the market as well), but at least there was an understanding made and hopefully lessons learned by the cooperative not to let an importer lock the price on the next contract. 

C) the importer replies to a request for renegotiation with a curt, "It is not my Problem."

As you may have guessed, C was the answer received by the cooperative. 

The end result: What the importer did offer was an additional month to fulfill the contract. Unfortunately for Tunas Indah, the price on the conventional market did not retreat. Unfortunately for the importer I am bringing their business dealing to the surface by presenting the view of Tunas Indah Cooperative whose pleas for renegotiation went unheard in the office of an importer in the USA. 

How much did Tunas Indah Cooperative lose
           in the deal with the importer?

So, Mr. "It's not my Problem", let's take a look at your impact because it is your problem now. Essentially, you made the cooperative subsidize your purchase. Yes, a cooperative of farmers living off less than US$200/month subsidized your purchase. Where is the justice in that? You didn't even consider renegotiation, much less consider the impact your stance had on the cooperative itself. 

Whether "It's not my Problem" were the actual words you uttered in response to a request for negotiation does not really matter, as that was definitely the impression you left on your trade partner. So much for your claim that you are utilizing a progressive approach to coffee sourcing worldwide because your action was more reflective of colonial era traders and does not follow Fair Trade principles. 

Again, let me reiterate, when I inquired if there had been a prepayment of any amount with the contract, the answer was no. How can you, as the importer, refuse to renegotiate a contract when you didn't even provide a prepayment when it was requested by your trade partner? 

When I made further inquiries into the current issues faced by local cooperatives, I learned that five of the twelve cooperatives in Aceh may collapse as a result of speculators like Mr. "It's not my Problem." A lot of time, effort and capacity building has gone into building up our Fair Trade cooperatives in the South, and it is the work of speculators that will tear it down.

Why I think it is your problem now... 
           Because I still believe in Social Action!

To a Fair Trade coffee importers guilty of speculation: As a Fair Trade certified organization, when you and other coffee importers are speculating on Fair Trade markets, more Fair Trade cooperatives will collapse. Furthermore, your callous attitude defending your speculating activities does not hold up to the principle of maintaining long-term relationships. When the Fair Trade certified cooperatives are wiped out due to speculators, that leaves no organization to certify as organic or Fair Trade. How will you supply the high demand for organic Fair Trade certified coffee from Sumatra after the last cooperative has closed its doors?

Is it your problem yet?

FLO-Cert: Here are some suggested areas for improvement, and these are suggestions coming from the COFFEE FARMERS, so pay attention:

Firstly, re-evaluate and upgrade your auditing and monitoring of Fair Trade Coffee importers to the extent you audit and monitor coffee cooperatives. Push them out of their comfort zones with frequent four or five day audits detailing their actions and policies like you do with the cooperatives. If it increases your cost to do so, increase their fees to cover the cost of policing their fellow importers unscrupulous behaviors and disregard for the cooperatives they deal with.

Fair Trade cannot support a system that scrutinizes one part of the supply chain and dismisses the behaviors of another.

Secondly, this issue of prepayment. For several years there has been a flagrant disregard for any prepayment when requested. Let's re-evaluate this principle in light of the recent global economic crisis where it was difficult for Fair Trade Organizations regardless of where they were.

I suggest that FLO-Cert utilize a democratic system in which members, from farmer cooperatives to exporters to importers and yes, to coffee roasters, are engaged to arrive at a new principle establishing a lower minimum percentage prepayment that is realistic and acceptable to all. It is better to have a minimum prepayment that is agreed upon than a payment that is frequently disregarded for years and detrimental to Southern partners, as is the current situation.

Thirdly, to protect Fair Trade cooperatives from the likes of Mr. "It's not my Problem" there needs to be communication system integrated for cooperatives to contact and report speculative behaviors directly to FLO-Cert; and in turn for FLO-Cert to investigate with threat of revoking an importers certification. This has got to end now, and it is within the grasp of FLO-Cert to do it.

Fourthly, Make Trade Safe. Establish acceptable contract templates for Fair Trade importers, exporters and cooperatives to utilize that has your stamp of approval. Formalize the contracts so as to remove speculation! Mr. Johannes Egger, your auditor in Indonesia shared his challenge in tracking down these contracts because they are made over the phone. In short, as an auditor he has no paper trail to follow.  I suggest you make a simple, easy-to-understand contract which specifies the quantity, but not locking in the price. Make trade safe for both parties. This is within your grasp! 

Fifthly, end the certification of corporations that have long histories of labor and human rights abuses (i.e. Nestle). See their efforts to generate a brand that is Fair Trade certified for what it is: A Public Relations bid with Corporate Social Responsibility as the rational. How can you certify one hand as Fair Trade while the mindset and activities of the corporation remain unchanged with the other hand in a firm stranglehold on the throats of workers and farmers? There are so many issues with this company, in the South your certification of them has left a serious rift in the Fair Trade Movement and you need to know that! For more on your Fair Trade certified company, have  a look at the Corporate Watch list on Nestle's corporate activities  

Make Trade Fair to both the South and the North

and with that said, What can we do as Fair Trade advocates, supporters and consumers?

I still believe in Social Action!

XX Coffee Importer
XXXXX Xxxxxxxxx Xxx
Xxxxxxx, Xxxxxxxxx 

Bonner Talweg 177
53129 Bonn

Telephone: +49 228 949230
Fax +49 228 2421713

Fair Trade consumers, advocates and activists, 
       it is up to us to Keep Fair Trade Fair!

If you are reading this blog, I encourage you to take direct action!!! Fire off an email or call FLO! Let them know that the days of speculation, callous attitude toward Southern Trade partners, double standards, and utter disregard for established Fair Trade principles are over! As a Fair Trade certified organization, an importer must be held accountable! Call for transparency and demand social justice! The importer in question can begin by returning the US$20,000 owed to the Tunas Indah Cooperative! 

That is what makes Fair Trade different. There is a system of accountability throughout the supply chain from farmer to cooperative to exporter to importer to roaster and to retailer. What a marvelous and empowering system!

Write your views about the status quo to FLO-Cert. Take action and contact your favorite Fair Trade coffee roaster and ask them if their importer provides a pre-payment, then ask to see the actual contracts! You can make sure your Fair Trade Coffee importer is not speculating by locking in a price three or four months ahead of the harvest and essentially destroying the coffee cooperatives in the South!

Part III in this series will exemplify where the future of Fair Trade must go in order to be sustainable.

Mitch Teberg, MA


  1. Excellent work Mitch. I would imagine that what you describe is not an isolated case.

    The question in my mind is whose side is FLO-Cert on? Surely the capacity building and tools you describe for the producers should be an integral part of their audits? Even outside of Fair Trade, it is not uncommon for buyers to pay advances for products, why should it be any different here?

  2. Agree with post above. Who drew up the initial contract? Someone really did not do their part in protecting the suppliers interests.
    -Nadine, Topanien Global Gifts,

  3. Thanks for your commitment. You’ll be happy to know Fairtrade has initiatives in place to deal with the issues brought up in this blog:

    In March Fairtrade International (FLO) announced new trade standards for coffee to encourage fairer negotiations, clarify the role of price fixing, and reduce speculation. We are also facilitating training for producers and traders on contracts, price fixation and risk management strategies. We have set up a new mediation process in case a producer and trader have a contract dispute. (For details:[pointer]=1)

    Fairtrade International’s Global Producer Finance Unit was set up two years ago to facilitate financing opportunities for producers. They are working to secure more and better opportunities for all types of financing including pre-financing, credit, insurance, etc.

    The Fairtrade certifier FLO-CERT conducts detailed audits for traders against all requirements in the Fairtrade Generic Trade Standard. The standard says Fairtrade traders must provide pre-financing when producers request it. It has a complaints procedure for specific grievances (for details: Some traders are audited by the national labelling initiative for their country instead of FLO-CERT.

    Reykia Fick
    Fairtrade International (FLO)

    1. How excellent to find this blog, and a detailed response from FLO themselves! That is how it is done! Always keeping in mind that the Corporate Executive controlled system let the International Supply Agreements die, not to mention the low priority the put on anything that can be sacrificed for profit-maximization.

  4. Thanks for telling us about this issue which definately does not feel right, even after reading the FLO's reaction.
    For the right nuance it would be very interesting if you could investigate a case where the contrary happens: the market price of coffee went down after the date of the prefixed price deal. How did the different stake holders react then to keep the long term partnership in place, who took their responsibility and who sticked with the FT criteria. Look forward to that side of the story next time.

    Oh and by the way if you visit Peru or India please independently interview our fair trade teenage photographers. I look forward to hearing your point of view on how FairMail can improve too.

    Peter den Hond
    director FairMail Cards (WFTO member)

  5. A short, unremarkable sunset was nearly four hours behind us when my driver and I approached three Bolivian men on the side of a dirt road in Caranavi.