Bookmark and Share Home   »  Understanding the Issues  »  Free Trade Agreements

NACLA REPORT ON THE AMERICAS: Keeping trade fair in Mexico

March 26th, 2006

by Hope Bastian

Sam’s club, a nationwide wholesale chain with more than 500 locations across the United States, recently joined a growing roster of large corporations that sell Fair Trade products. The company announced last September that it would begin carrying the Brazilian Marques de Paiva brand of Fair Trade certified coffee. Nestlé, which is one of four major coffee roasters that collectively buy almost half of the world’s annual coffee output, soon followed suit, launching its own Fair Trade coffee. Indeed, transnational corporations have started tapping into the Fair Trade market, taking advantage of U.S. and European consumers’ willingness to pay more for products they believe guarantee producers in poor countries better prices for their goods.

On the surface, the crossover of Fair Trade products from a small specialty market to the mainstream would seem a welcome development for small-scale coffee producers in places such as Mexico—the world’s top supplier of Fair Trade and certified organic coffee. But some Mexican farmers see things quite differently: they say the prices offered by the Fair Trade market are no longer enough for them to cover the costs of production and take care of their families.

Francisco Cruz Sánchez and Ofelio Ángeles Ortega have been producing organic coffee for 20 years as members of Yeni Navan, a cooperative of about 1,100 small coffee producers in the southern Mexican state of Oaxaca. The cooperative has a simple office on the outskirts of Oaxaca City. One of the walls of the office has a colorful mural of women in traditional dress from different regions of the state. Next to the painting is a large map with the locations of the 44 indigenous communities where Yeni Navan’s producers live. Francisco Cruz Sánchez points out his hometown, Santa Cruz Yagavila, a settlement of 800 people up in the Sierra Norte Mountains, seven hours away from the city by bus. He complains that this year the harvest wasn’t very good there. “We just got too much rain at the wrong time,” he says shrugging his shoulders. “We lost a lot of the harvest because of that and competition from the coyotes.”

Ángeles Ortega, now serving as the president of Yeni Navan, grew up in a coffee-producing family in El Ocote Tataltepec, a remote village in the mountains of Oaxaca. “I was just a little boy back then, I wasn’t thinking about coffee prices yet, but I remember my parents talking about how the prices were falling,” says Ángeles Ortega. “My father didn’t know what to do. The way the prices were, he wasn’t making any money growing coffee.”

In Mexico, Fair Trade coffee first started to take root in the mid 1980s as coffee prices in the country began a slow and erratic decline. Well-founded rumors spread throughout Oaxaca that the state-owned Mexican Coffee Institute (INMECAFE), which provided small producers with credits, technical assistance, stable prices and export markets, would soon be shut down as part of the agricultural sector reforms preceding the North American Free Trade Agreement (NAFTA). Ángeles Ortega’s family became involved with Yeni Navan after hearing from the local priest about a cooperative of organic coffee producers that was forming in order to seek out new markets and better prices.

Since 1962, the International Coffee Agreement (ICA), an accord between coffee-producing and importing countries, had established quotas to regulate the global coffee supply and maintain the market price of coffee. But at the end of the Cold War, the United States pulled out of the agreement and quotas could no longer be enforced, leaving supply and prices to the vicissitudes of the market. Coffee production in Vietnam and Brazil skyrocketed, creating a coffee glut and a dramatic crash in the price of coffee worldwide. The dismantling of INMECAFE the same year left small producers in Mexico vulnerable to price fluctuations just at the time when they most needed to be protected.

Because they were organized, Yeni Navan members escaped the worst of the crisis. By 1991, with help from the Union of Indigenous Campesinos of the Isthmus Region (UCIRI)—another growers’ cooperative with experience selling coffee directly to European importers—Yeni Navan found its first clients in Europe. Before, with the dissolution of INMECAFE, the farmers had little choice but to sell their harvest to local middlemen, called coyotes, who would buy the coffee at rock-bottom prices and then sell it abroad for a profit. But through the budding Fair Trade market, cooperatives like Yeni Navan began directly linking up with European importers that promised to offer “fair” prices.

The consolidation of the Fair Trade market gained a boost in 1992 when a loose network of European Fair Trade advocacy organizations joined together to form TransFair International, which later became the Fairtrade Labeling Organizations International (FLO). Grouping together 20 national Fair Trade organizations, FLO sets standards that producers and companies must adhere to for their products to be sold with the Fair Trade label. It also administers a certification program and registry of Fair Trade companies and producers.

FLO’s Fair Trade standards require that coffee buyers establish long-term, stable relationships with the producer cooperatives, pay FLO-established minimum prices and provide cooperatives with pre-shipment financing if requested. Through the Standards Committee—a body with representation from member organizations, producer organizations and traders—FLO sets minimum prices and conditions.

According to FLO’s Web site, minimum prices are determined by calculating the cost of sustainable production and living costs in each region where coffee is grown. There are currently two minimum prices for coffee: one for coffee from Central America, Mexico, Africa and Asia and a second for coffee from South America and the Caribbean. FLO’s Producer Business Unit or any of the 20 national Fair Trade organizations can make requests for changes in standards and pricing. All Fair Trade producers within the FLO system are grouped into regional organizations like the Latin American and Caribbean Coordinator for Small Producers of Fair Trade (CLAC). These regional organizations also hold seats on FLO’s Board of Directors where they can petition for changes in standards and prices.

In 1995, the Fair Trade price for 100 pounds of washed Arabica coffee beans was set at $120, supplemented by a $5 “social premium,” and if the coffee was certified organic, the price went up another $15. When these prices were established, Cruz Sánchez says they were fair: “In those years the price was very good, very high, because here in Mexico the costs of production and processing were lower.”

At the time, the Fair Trade market was a lifeline to many small producers. Those without access to this specialty market found themselves facing a limited range of equally unappealing options: migrating to find work, taking on loans with exorbitant monthly interest rates or planting other crops—in some cases, illegal ones—to make ends meet.

As producers of organic Fair Trade coffee we always received 16 pesos, 17 pesos, up to 18 pesos per kilo of coffee,” Cruz Sánchez recalls. “A conventional, independent producer who was not part of any organization would only receive 7 or 8 pesos. So back then you saw the difference, we would get almost double the price.”

When the free market price for coffee beans slightly improved with the 1996 harvest season, organic Fair Trade farmers found that although they were producing a more expensive and labor-intensive organic crop, they were only receiving marginally higher prices than non–Fair Trade producers. These farmers began asking FLO to adjust its minimum prices to reflect the rising costs of production and in 1999, the base price was raised by one dollar to $121 per 100 pounds of green Arabica beans; the organic and social premiums stayed the same.

But the small price hike has not helped farmers offset rising production costs, nor have prices been adjusted for inflation, which rises by an average of about 6% a year. Increasing shipping costs, labor costs and certification costs have also cut into the small profit margins that the Fair Trade market once promised producers. Ten years ago, for instance, it cost the cooperative 4,000 pesos to transport and fill a container at its warehouse with beans for export. Today, the same process costs the cooperative 10,000 pesos.

“Year after year the costs of production have increased, but the base price has stayed at $121 for 100 pounds [plus the $5 social premium],” says Cruz Sánchez. “Now, due to the high costs we pay, it is no longer such a good price.”

Taurino Reyes Santiago, director of Certimex, a Mexican certification body contracted by FLO to perform inspections, agrees. “The prices [for Fair Trade coffee] have not changed, the price structure is the same, but then each year the costs of living continue to rise and rise and rise,” he says. “Maybe the costs of production are still covered, but the costs of living and the basic necessities that the producer has are no longer covered.”

In the last five years, immigration has increased from Mexico’s coffee-growing regions, forcing more producing families to depend on contract labor to replace that of family members who have left to find work in the United States or other parts of Mexico. Organic coffee farmers have been hit especially hard by the increases in labor costs. Instead of simply applying chemicals, for example, organic farmers must pass through the fields two or three times to harvest beans at their optimal ripeness. And keeping the organic coffee bushes healthy requires the near constant care of fieldworkers. In some areas of Oaxaca, daily wages for laborers have doubled in five years.

“No one here wants to work for less than 120 to 150 pesos a day. Whereas in other regions it may cost 60 to 40 pesos, in the regions where there is a lot of emigration the labor costs go up 100 percent,” observes Reyes, the Certimex director. Many producers cannot afford to pay the extra labor. As a result, cooperatives report that the volume of coffee beans they were able to buy from their members decreased in the 2004-2005 harvest because beans were left on the bushes for lack of money to contract the necessary labor.

The inspection process represents another huge cost for cooperatives that sell Fair Trade and organic certified coffee. Yeni Navan’s coffee must go through three inspection and certification processes before it gains access to the Fair Trade and organic markets. The first and most rigorous process is the cooperative’s own internal inspections of members’ fields, processing and storage areas to be sure that organic standards are being strictly followed. Any member who fails the internal inspection will not be allowed to sell their coffee to the cooperative. After the internal inspections are completed, Yeni Navan contracts Certimex to audit the cooperative’s internal certification and controls procedures. Certimex inspects a sample of members, meaning a second trip to land parcels and process and storage facilities to confirm that organic standards are being met. Once this inspection is complete, the cooperative’s coffee is certified organic by Certimex and Naturland—a certifier recognized by the European Union. But before the coffee can be sold on the Fair Trade market, a third inspection is carried out under the auspices of FLO—in this case, sub-contracted to Certimex.

In the most recent harvest, the internal and external inspection processes cost the cooperative $15,938. Yeni Navan spent another $9,637 in fees and dues to Fair Trade and international organic certifying organizations like FLO, Naturland, the International Federation of Organic Agriculture Movements and CLAC.

With the extra investment of time and money that come with being a member of a cooperative, many Oaxacan farmers have simply found that producing Fair Trade organic coffee no longer enables them to make ends meet. Indeed, says Ángeles Ortega, 210 small producers have left the cooperative in the last year. Reyes also admits the harsh reality: “You’re not going to see a significant difference in the lives or incomes of farmers … when production is so low and the needs for resources, investments and costs of production are so high.”

In the most recent harvest, slight improvements in coffee prices on the world market led some of the newer Yeni Navan members to sidestep the cooperative and sell their coffee to the coyotes. Although coyotes pay less than the cooperatives, they are also much less demanding about quality. This means that growers can economize on labor by picking both ripe and unripe beans and get away with selling inferior quality beans the cooperative would never buy. Another incentive is that coyotes pay cash.

Without the extra labor costs, getting a decent price for their coffee on the free market might help in the short term, but prices will inevitably drop again, likely sending these producers back to the cooperative. But with increasing costs, stagnant prices and more and more producers leaving the cooperative, Yeni Navan’s production levels have fallen precipitously. Last season, the cooperative saw its production decrease by 60% and it was unable to fulfill several of its contracts with importers. If these shortfalls continue, Yeni Navan’s fair-weather members may not have a cooperative to come back to when the free market coffee prices take their next dive.

Many small producers wish FLO would raise the minimum prices to reflect increases in the costs of production and costs of living over the last 10 years. Even within FLO there are some like Guillermo Denaux, Regional Coordinator for Mexico and Central America and Coffee Product Officer, who recognizes that the Fair Trade price is sometimes not enough, but feels trapped between the demands of buyers and traders in different parts of the world.

“There are some buyers who actually find the minimum price too high. If the price were lower, the volumes would actually be higher and having more volume in sales within the Fair Trade system would have a more positive impact for producers,” says Denaux. “But of course we have heard from a lot of producers, especially the ones in Mexico, that with the actual minimum price right now it’s quite difficult to cover the costs of production.”

In the end, the Fair Trade market is still subject to the mechanics of the free market. “This price has been here since FLO’s existence, and even though there is a lot of pressure to change it, I think that since it is so difficult to find a common agreed point between buyers and sellers there has been little movement,” says Denaux.

FLO’s minimum prices have been a recurring topic of discussion at the producers’ regional CLAC meetings and the quarterly meetings of Mexican Fair Trade producers. But Cruz Sánchez and other farmers fear that changes in FLO are taking the international organization in an entirely different direction—furthering the trend towards even lower pricing. “I think that FLO is now becoming a better friend of the transnational corporations,” he says. For him, recent developments, such as Nestlé’s entrance into the Fair Trade market, indicate that the Fair Trade movement is moving further away from its roots. And as Fair Trade goes mainstream, Cruz Sánchez worries about huge coffee plantations’ efforts to gain admission to FLO. If they succeed, he predicts, “It's going to be a disaster, a big threat for small producers.”

Hope Bastian is a freelance writer educator with Witness for Peace. She is based in Mexico.