coffee futuresWhen I first started studying fair trade, I was absolutely convinced that there was one main benefit to fair trade-certified producers – a guaranteed minimum price. Historical data clearly shows the tremendous volatility of coffee prices over the last few decades. It seemed clear that guaranteeing a minimum price to farmers for their coffee or tea would create more income, more stability, and more confidence in farming as a secure investment. But is a guaranteed minimum price actually the central benefit of fair trade for farmers?

Actually, the idea that minimum pricing is an absolutely core tenet of the fair trade movement (different from capital-F-capital-T Fair Trade as associated with the independent organizations FLO and FairTrade USA) no longer seems to be the case. The fair trade movement is both decentralized and competitive, and two of the three major certifiers (Rainforest Alliance [though yes, not technically “fair trade”] and IMO*) do not require buyers to pay minimum prices that they as organizations establish. This difference is very important to recognize, and potentially represents a trend in the direction fair trade is moving.

Looking more deeply within the FLO and FairTrade USA systems (IMO as well), buyers not only pay the minimum price agreed upon for the products, but they also pay an additional percentage of the total value of the purchase (usually 5 to 15%) to a cooperative or worker-managed fund, known as the “Social Premium Payment.” The resulting “Social Premium Fund” is democratically and autonomously managed by the cooperative or workers’ group to propose, approve, and implement projects that further their development goals, often in the areas of health and education.

While most people who know anything about fair trade are aware of minimum “fair” prices, I find many fewer are familiar with the existence or impact of the Social Premium Funds.  In 2010 alone, FLO facilitated the payment of almost $15 million USD of Social Premium Payments – not a shabby amount.  Recently, I’ve been questioning whether or not the real benefit of fair trade might actually be in these premiums.

When I interviewed Michael Conroy, ex-Chairman of the Board of FairTradeUSA and international certification expert, he made it clear that: “Minimum prices are much less important nowadays than price premiums, especially in tea.”

Why is that? For one, tea is not coffee, and it turns out that price premiums for tea are exceptionally high, while minimum prices are quite low.  Over 50 different minimum prices are set by FLO depending on the origin, organic status, and quality grade, but minimum prices are typically between $1.20 and $2.50 / kilo. The established Social Premium Payments are normally $0.50 / kilo. Ranging from 20 to 42% of the minimum purchase price, these Social Premium Payments are substantially higher with respect to the established minimum prices.

Fair Trade chartMore importantly, Social Premium Payments are always made even when buyers pay above the minimum price. Obviously, when market prices for coffee are sky-high (as they are right now) or in the case of any quality tea, minimum prices are never in question, and are often scoffed at by gourmet gurus. However, even when purchase prices are high and quality is rewarded (as it should be), producer organizations still earn the premium payment. And again, these premium payments go directly to the cooperatives themselves with zero margins, service fees, or marketing fees taken out.

While I have seen and heard of instances of premiums not being used as perfectly as possible, the way in which Social Premium Funds support producer democracy, local project management, education, health, and self-governance is both critical and largely effective.

With any system, it’s easy to critique and misunderstand from afar, but digging deeper into the real benefits and impact of fair trade, it appears that Social Premium Funds have a crucial role. As more fair trade producers become certified, we as consumers will create funds and opportunities to further their initiatives and holistic development.

*  In the IMO system, companies and producers determine floor price together, and IMO audits the calculation, COGS, and so on to ensure it is fair.