Fair Trade Coffee in Nicaragua: Impacts of certified production on cooperatives, farmers and laborers

The objective of this dissertation is to study the opportunities and challenges of the Fair Trade certification system in altering conditions of coffee production in Nicaragua. The aim is to analyze the advantages as well as the constraints of Fair Trade in assisting farmers and their cooperatives, involving them in the governance of coffee value chains and improving labor conditions. The study highlights the context of increased globalization, deregulation of coffee markets, and declining and volatile coffee prices. The research methods utilized were primarily qualitative. Seven months of fieldwork was carried out in Nicaragua in 2005-2006 and 2008 to interview and observe a wide range of actors in Fair Trade and conventional coffee production and trade. Value chain analysis and convention theory were utilized as theoretical frameworks to understand if Fair Trade can improve the position of small-scale farmers and hired workers as participants in the global economy. Through the lenses of value chain analysis Fair Trade is seen as a governance mechanism where multiple actors with diverse interests influence each other in their interactions in establishing rules and norms for conditions of production. The results indicate that Fair Trade has supported certified producer organizations particularly during the extremely low coffee prices in 2000-2004. However, Fair Trade is a limited market existing parallel to conventional trade. This results in farmers and cooperatives selling a large part of their production to conventional markets and market prices having a greater importance for them than Fair Trade-regulated prices. Since 2005, market prices have frequently been above or close to Fair Trade minimum prices, reducing the significance of Fair Trade- controlled prices. Certified farmers are vulnerable to price volatility also because when market prices are higher than Fair Trade minimum prices, the price volatility is the same for Fair Trade and conventional coffee. Fair Trade does not require that higher than market prices be paid to certified farmers. Prices and services offered by Fair Trade certified cooperatives to farmers have not remarkably exceeded those offered by conventional actors in Nicaragua. Although the minimum price system is a safety net in case of a future price collapse, the results of this research indicate that challenges exist in distributing benefits equally between and within producer organizations. The implementation of minimum prices also involves other practical challenges such as to what level prices should be set under constantly changing market prices. The physical quality characteristics of coffee affect its price and, because they are so varied, it is impossible to create a pricing system taking all these characteristics into consideration. The Fair Trade premium for social development has provided financing for cooperatives and farmers. While some of these funds have been targeted to pressing social needs, a large part of the funds have been used to finance improvements in producer organizations and to pay for certification fees, undermining the ability of these funds to focus on social issues. In addition to the Fair Trade social premium, cooperatives and farmers have been assisted by numerous development projects. As a result, infrastructure in cooperatives has improved. A possibility for making Fair Trade pricing more transparent for all actors in the value chain would be to make the social premium a percentage of retail price of Fair Trade products and to document more carefully its use in improving cooperative and farm infrastructure and management as well as its use to improve social conditions in coffee producing communities. Fair Trade has not significantly altered the working conditions of hired labor in coffee production in Nicaragua. Because the advantages Fair Trade offers to farmers and cooperatives are limited and vary in different contexts, the system cannot present strict demands on improved working conditions. The participation of farmers and workers in formulating Fair Trade policies is narrow, as evidenced by most of the interviewed farmers and hired laborers not knowing they were involved in producing Fair Trade coffee and what this entailed. Despite changes aimed at involving producer organizations in Fair Trade governance, Northern actors exercise the greatest control of the system. Approximately half of Fair Trade certified farmers are also organically certified, globally and in Nicaragua. Although the Fair Trade/organic farmers receive price premiums, the benefits of Fair Trade are not clear-cut. As experienced by the interviewed farmers, organic farming has lower yields, especially when higher intensity management systems are compared. As a result, price premiums do not necessarily lead to higher income compared to alternatives. Inequalities in the distribution of value creation are estimated to be higher in Fair Trade than conventional coffee in the case of coffee trade from Nicaragua to Finland. In absolute terms, Fair Trade has offered slightly higher prices to producer organizations particularly when Fair Trade minimum price has exceeded market prices. In view of the many difficulties coffee production has faced in Nicaragua in recent decades, Fair Trade certified cooperatives have been successful. Fair Trade can provide financing for development and reduce price risk. However, many other risks exist for farmers and cooperatives including loss of crops due to diseases or adverse weather conditions. If small-scale coffee production in cooperatives is to thrive, well-managed cooperatives and farms are needed. Many Fair Trade certified farmers produce low volumes of coffee. While price premiums are welcome, income from small quantity of coffee remains meager. As a result, some Fair Trade farmers are trapped in poverty.