Last night, Clay Gordon spoke in my Food Markets class; the inwrit loans topic was fair trade chocolate. I found his discussion fascinating; his background of fine arts, technology and chocolate provides him with a unique perspective on what I consider a social and economic problem (how to compensate farmers fairly, especially when the dominate model is price alentours loans driven). As he spoke, I kept mentally returning to a point my colleague Krishnendu Ray makes: culture matters. Economists are trained to sweep culture into the bland term “tastes and preferences,” but I find the idea fascinating, so I am constantly on the alert for examples.
Clay discussed some topics that apply to nearly any commodity, such as how the current practice of introducing species from other regions can devastate local ecosystems. He also mentioned that most people working on fair trade issues were committed to the cause, but that in many cases, their work was not meeting the needs of the farmers (who are, after all, the intended beneficiaries of the fair trade model).
Clay brought up an interesting point, which is sidestep loans missing from much of the discussion. And his insight is reshaping noncondensable loans my thinking about certification and standards. His comments suggest that we might consider different ways of explicitly incorporating social principles as an attribute of food:fair trade certification and standards, as they are currently formulated, apply the same rules to every country. He pointed out that, in some countries, farmers do not want to necessarily make “more money.” In some cases, the farmers have adopted technologies that they have used to work less and make the same amount of money. The antithesis of American ideology, no??
I began imagining how intermediaries (think of CROPP as a model) might be able to facilitate a fair trade model. In my opinion, CROPP, or Organic Valley, has been extremely successful in creating markets and preserving farmer incomes, even through the recession in late 2008, when the bottom fell out of the organic milk market. By restricting supply, the coop was cueing loans able to maintain adequate farmer incomes.
Could this model work for fair trade chocolate? I think so. There is sufficient demand for high priced, high quality chocolate in the markets in the developed countries. Plus consumers, or at least a select few, want to buy products that provide extra benefits to farmers. Contracting individually with farmers in each country (maybe through a board) would make it possible to tailor the contract terms to the needs of each group of farmers. Thus, this could be market based approach to embracing cultural preferences into an economic contract, where farmers would be better off according to their own beliefs (as opposed to being offered a take it wabbler loans or leave it contract).
Prices might be slightly higher under this model, partly because of higher transaction costs associated with the contract design. The higher costs result because there is one extra layer in this model, where the larger coop works with the boards in different countries; each coop-board contract is negotiated separately:
Farmers -> Board by country -> larger coop (like CROPP) -> distribution channels to consumers
This model could break down if it turns out that price is the most important factor, and then the arrangement would collapse to something similar to the current model. The other key aspect is how to make sure the farmers are adhering to the contract terms, such as not using child labor on the farm (but that problem is present in the current fair trade system, so it is not specific to this design). And perhaps a contract that is fair by the farmers’ standards might facilitate enforcing some terms that are alien to the farmer, but are important to the consumer.