INTRODUCTION
1. The fair-trade approach presents itself as an alternative strategy, positioned between free trade
and protectionism, to address the issue of poverty in developing countries. It also offers an alternative
way for consumers to express their opinion through “political consumerism” or “responsible
consumerism”. People buying fair-trade products are portrayed as using their consumer choice to
voice their concerns about poverty in less developed countries, and about a trading system that is
considered as unfavourable to these countries. Focusing on the food commodity market is a natural
choice for the fair-trade movement because most developing countries are dependent on these products
for export earnings.
2. In 1988, the first fair-trade labelled product (coffee) was launched under the Max Havelaar
brand. Since then, fair-trade has been growing at a rapid pace and now covers various products, such
as cocoa and chocolate, coffee, bananas, tea, honey products, textiles and handicrafts. Cocoa sold with
the fair-trade label captures a very small share of the cocoa market (0.1 percent). However, based on
the steady growth of fair-trade and the support of public opinion and governments, some fair-trade
participants claim that the idea will move beyond niche markets and become more mainstream.
3. Under Action 9 of its work programme of September 2004, the Consultative Board on the World
Economy requested the ICCO secretariat to undertake an analysis of the situation and prospects for
fair-trade cocoa and its potential market effects. The objective of the Board, according to the work
programme of the Board (document CB/3/2 Rev.1), is to assess whether “a very significant increase in
the tonnages of cocoa beans sold under the fair-trade brand, and therefore at the fair-trade premium
price, would lead to cocoa oversupply and/or depressed demand for non-fair-trade cocoa”.
4. This first document on fair-trade prepared by the ICCO secretariat provides only the basic facts
on fair-trade in cocoa; the volumes traded, the characteristics of the “fair-trade price” and the
additional benefits and costs of this approach. It is envisaged that the factual information on fair-trade
in cocoa provides a good basis for the Board to give guidance to future work by the secretariat.
THE KEY PARTICIPANTS IN THE FAIR-TRADE MOVEMENT AND DEFINITION
5. The fair-trade movement began to take its current form in the 1960s. It is united in the view that
conventional trading relations between the South and the North are unfair and unsustainable and that
this issue can be addressed through a different approach to the trading system. Its goal is to tackle
poverty in developing countries through trade and its pragmatic approach is one of the key reasons for
its success. However, the diversity of the movement, its lack of structure and economies of production
scale was an impediment to its sustainability. Since the early 1990s, the fair-trade movement has
become more organized to address the challenges it faces. The harmonization of definitions, the
increased professionalism and emphasis on quality assurance, the direct marketing through
supermarkets and the establishment of working relations with mainstream businesses to enable
economies of scale, have further secured steady growth of fair-trade.
6. The organizations engaged in fair-trade can be divided into three groups:
• The network and umbrella organizations of the fair-trade movement, which consist of the
following four organizations: the Fairtrade Labelling Organization (FLO), the International
Fair-trade Association (IFAT), the European Fair-trade Association (EFTA) and the Network
of European Worldshops (NEWS). The Fairtrade Labelling Organization (FLO) was
established in 1997, and is the worldwide fair-trade standard setting and certification
organization. Since 2004, it has been composed of two independent bodies, FLO-I for
standard setting and FLO-Cert Ltd. for fair-trade certification and auditing activities. The
FLO has established common principles, procedures and specific certification requirements
for fair-trade and certifies mainly commodity products.
This relates partially to the fact that non-commodity products are usually not subject to direct comparison of price and quality. The FLO deals with cocoa, as well as with coffee, bananas, tea, honey products, rice, fresh
fruits, juices, sugar, sport balls, wine and flowers. It estimates its total retail sale value at
$500 million in 2004. The FLO membership consists of the 19 National Initiatives located
across Europe, North America, Mexico and Australia/New Zealand, as listed in Table 1 and
has recently introduced a common label to be applied across all products in all countries.
The International Fair-trade Association (IFAT) was established in 1989 and is a worldwide
membership organization that brings together both producers and buyers. It is a federation to
promote fair-trade and a forum for exchanging information to help members increase benefits
for producers. It consists of approximately 110 producer organizations and 50 buying
organizations. The Network of European Worldshops (NEWS!), established in 1994, acts as
the umbrella body for the approximately 2,700 “world shops” that sell predominantly
fairtrade goods across Europe. The European Fair-trade Association (EFTA), established in
1990, is an association of 12 importing organizations in nine European countries across
Europe.
• The Southern producer organisations, which supply the products, are traditionally cooperatives or associations. Presently, 15 have the FLO certification to sell cocoa beans under the fair-trade label. While cocoa is mainly produced in Africa (71%), 12 FLO registered cocoa producer associations are located in the Latin American and Caribbean region. FLO registered traders only buy part of the cocoa beans produced by the participating cooperatives. The remainder is sold in the mainstream market. Table 2 provides an exhaustive list of the producer organizations with their main characteristics.
• The fair-trade importing organizations, known as Alternative Trading Organisations (ATOs)
are traditionally non-governmental organizations (NGOs) in Northern countries. These are
the buying organizations, which act as importers, wholesalers and retailers of the products
purchased from the producer organizations. They focus on improving market access and
strengthening producer organizations. In Europe, they sell their products through “world
shops”, local groups, campaigns, wholesale and mail-order catalogues. Table 3 provides an
exhaustive list of the 47 FLO registered cocoa traders.
7. There have been various definitions of fair-trade developed in the past. However, in an attempt
to produce a widely accepted definition, an informal group of umbrella bodies and network organizations called FINE (composed of FLO, IFAT, EFTA and NEWS) has defined fair-trade as follows: “Fair-trade is a trading partnership based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South. Fair-trade organizations (backed by consumers) are engaged actively in supporting
producers, awareness raising and in campaigning for changes in the rules and practice of
conventional international trade.”
THE COMPONENTS OF FAIR-TRADE
8. The FLO approved producer organizations must comply with a number of requirements. Only
organizations of small farmers can be given the FLO certification. The FLO fair-trade standards for
cocoa require the following :
• The fair-trade activity is to promote the “social development” of the organizations. To this
end, the FLO certified producer organizations have to consist mainly of farmers managing
their own farms and the organizations must have a democratic and transparent structure.
• The fair-trade activity is supposed to enhance the “economic development” of the
organization. To this end, the FLO certified producer organizations must have the capacity to
export their production to strengthen their business operations. Moreover, the fair-trade
premium is supposed to be managed democratically.
• Under the heading of “environmental development”, the FLO registered producer
organizations have to include the environment in farm management. More specifically, the
use of certain listed pesticides is prohibited and the production of organic cocoa beans is
encouraged.
• Working conditions in FLO registered producer associations have to follow the International
Labour Organisation (ILO) Conventions. The FLO “standard on labour conditions”
describes how child labour can be used, as well as the requirements in terms of freedom of
association and collective bargaining. All farm workers have to work in a safe environment
and under fair conditions of employment, especially regarding wages.
BENEFITS AND COSTS ASSOCIATED WITH FAIR-TRADE AT THE PRODUCER LEVEL
9. The most essential characteristic of fair-trade is that producer organizations receive a higher
price for their cocoa beans. The fair-trade price represents the necessary condition for the producer
organizations to have the financial ability to fulfil the above requirements, and to cover the
certification fees. The differential in the price of cocoa beans between the conventional market and the
fair-trade market represents the consumers’ willingness to pay for a certified product. The fair-trade
prices are calculated on the basis of world market prices, plus fair-trade premiums. The fair-trade
premium for standard quality cocoa is US$150 per tonne. The minimum price for fair-trade standard
quality cocoa, including the premium, is US$1,750 per tonne. If the world market price of the
standard qualities rises above US$1600 per tonne, the fair-trade price will be the world market price
plus US$150 per tonne.
FLO cocoa price per tonne =
Max {FLO floor price (US$1600); f.o.b. market price} + premium (US$150)
Chart 1 provides the f.o.b. prices for fair-trade cocoa beans that purchasers had to pay during the
September 1998 – February 2005 period and the corresponding monthly averages of the ICCO daily
prices, which reflect the prices of cocoa beans in the London and New York futures markets. It is
obvious that the incentive to sell under the fair-trade market for producers and, conversely, the
opportunity cost for fair-trade purchasers is higher during periods of low market prices, as was the case
in 1999-2001.
10. The “fair-trade price” or “FLO price” represents the price received by the co-operatives. The use
of the funds derived from the premium (US$150 per tonne) is decided by the General Assembly of the
Co-operatives, which is required to act with total transparency. A proportion of the premium may be
paid out to farmers but, in general, it is pooled in a social fund for the benefit of the community rather
than passed on directly to the farmers. The money is used for either cocoa related projects, such as
farmer training and creation of nurseries for new planting materials, or for social projects, such as
boreholes, schools and other investments. These benefit the whole community or the farmers
specifically.
11. In contrast to the premium of US$ 150 per tonne, there are no prescriptions under the fair-trade
arrangements on the use of the difference between the FLO minimum price of US$ 1,750 per tonne
minus premium (US$ 150) and the mainstream price. For example, if the mainstream market price is
US$ 1,200 per tonne, the difference with the FLO minimum price minus premium is US$ 400 per
tonne. It is up to the individual co-operative to decide on the use of these funds.
12. It is further noted that, in most cases, the farmers, at the moment of selling to their co-operatives,
receive the same price for their cocoa as when the co-operative sells mainstream cocoa. In most cases,
the co-operatives pay the same price to all farmers and they sell only part of their total trade volume
under the fair-trade arrangement. The co-operatives do not know which farmers have delivered to
them the cocoa they sell under their fair-trade arrangements. The situation naturally leaves open the
possibility for a co-operative to distribute advantages of the fair-trade arrangements among all their
members.
13. The cost of compliance includes the fees paid by the farmer organizations to the fair-trade
organization and indirect costs to comply with the FLO requirements. The cost of certification used to
be borne by the importers and not the producers. This made the FLO certification unique, by passing
the whole cost of the certification to the buyer. However, since December 2004, both registered
producer associations and traders have to support certification fees, mainly to provide additional
resources to the newly created FLO-Cert Ltd. For traders, as stated in Table 4, the costs are composed
of an initial application fee (up to €2 000 and payable only once) and an annual certification fee (up to
€3 000) dependent upon the total turnover of the trading company.
To get the FLO certification, producer organizations have first to pay an initial application fee (up to €5 200 and payable only once). For the following years, the fee is composed of a fixed amount (€500 per year), and a variable amount
depending on the value of cocoa sold under fair-trade (0.45% of the f.o.b. value), as shown in Table 5.
This implies that a co-operative, which sells 50 tonnes of cocoa in one season has to pay fees of
US$ 20 per tonne. With a fair-trade turnover of 500 tonnes the average fee is cut in half, amounting to
US$ 10 per tonne.
14. Financial benefits and additional costs for co-operatives associated with fair-trade, compared to
the conventional market are summarized below:
Sources of additional benefits
• Fair-trade price: the f.o.b. price paid to the co-operative is higher than the
conventional price and, by definition, more stable.
• Direct sales: the fair-trade supply chain does not usually involve as many
intermediaries as the conventional one.
Source of additional costs
• Cost of participation in the FLO system: certification fees, documentation costs, etc.
• Production costs to meet the FLO standards: possible additional labour, social and
environmental costs.
The size of the fair-trade market
15. FLO registered cocoa producer associations and National Initiatives have to report to FLO,
respectively, on their sales of cocoa beans and cocoa semi-finished products and sales of chocolate and
chocolate products under the fair-trade label. The corresponding volumes are modest, representing
less than 0.1% of the total cocoa market. In 2003, producers sold 2 687 tonnes of cocoa beans and
cocoa semi-finished products, in beans equivalent, under the fair-trade label. Table 6 gives an
overview of the share of total exports of fair-trade cocoa by country of origin during the period 1994-
2003.
As country information on sales is related to a very limited number of co-operatives in some
cases, the disclosure of volumes would have been against the FLO confidentiality policy. In 2003,
more than 90% of the sales originated from two producers: Kuapa Kokoo Ltd. (Ghana) and Conacado
Inc. (Dominican Republic). Consequently, the nine other producers concerned in 2003 sold less than
10% of the total, representing less than 200 tonnes. This highly concentrated market may be the result
of lower costs associated with trading for larger cocoa producers. Since 2003, five new small cooperatives in Peru, and a large one in Côte d’Ivoire have received the fair-trade certification. In Peru,
this is mainly the result of an ongoing United Nations programme to convert coca producers to
alternative crops.
16. Until 2003, cocoa and chocolate products were sold in the fair-trade market in 16 countries,
mainly in Europe. Table 7 provides sales information by country during the 1994-2003 period.
Presently, only information on total sales of chocolate and chocolate products is available, as the
National Initiatives do not provide detailed data on the cocoa content of these products. In 2003, 80%
of the total sales of chocolate and chocolate products were realized in only five countries, the
United Kingdom (35%), Italy (13%), Germany (13%), Switzerland (10%) and France (nine per cent).
Since 2004, fair-trade chocolate and chocolate products have also been sold in Japan, Australia,
New Zealand and Mexico. As shown in Table 8, the estimated market share of fair-trade labelled
cocoa in each country of destination is less than one per cent, with the highest shares (0.9%) in
Switzerland and Luxembourg.
17. Fair-trade certified chocolate and chocolate products are composed of various ingredients. It is
not always possible for all these ingredients to be sourced from a fair-trade-certified producer
organization and consequently for a chocolate product to be “fully fair-trade”. FLO policy defines the
conditions that allow a composite product to carry the fair-trade label. It is stated that all the
ingredients for which the certification exists must be sourced from fair-trade certified producer
organizations and 50% of all the ingredients, by dry weight, must be sourced from fair-trade, certified
producer organizations. However, exceptions to this rule exist as many manufacturers find it difficult
to strictly apply this rule. The implementation of these exemptions requires FLO approval.
