Estructuración y funcionamiento del algoritmo utilizado

The essential basis of fair trade pricing is a ‘floor’ or minimum price which is calculated based on three costing factors. Firstly, the cost of production, covering land, labour and capital, is based on the results of a survey of producers within a region. The second element

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is the cost of living, which includes a daily minimum wage estimated from data collected on worker’s actual expenses within “thee ‘baskets’ of costs: nutritious food, decent housing and other essential needs [medical, education, transport] (Fairtrade, 2014b). Finally, there is the cost of complying with fair trade standards, which includes such things as paperwork, reporting to FLO and attending assemblies (Nicholls and Opal, 2006, p41).

There is much debate about how this price is determined and whether it is in fact a ‘fair’

price. Adriani and Becchetti (2004) suggest that setting a price different from the market price may sometimes be justified from a microeconomic viewpoint. The authors argue that the prices which result from traditional trade of primary products (i.e. where a monopolistic/oligopolistic company buys from small producers) are established by the bargaining power of the two counterparts which is clearly greater for the company. They therefore reason that the fair trade price might actually “be considered as the market price which would prevail if the two counterparts had equal bargaining power” (Adriani and Becchetti, 2004, p6). Arguably, “fair trade re-embeds the market by internalizing the social and environmental cost of production into the price” (Schmelzer, 2006, p44), and therefore sets a price which is reflective of the true economic cost of production rather than the power of one party over another to push prices down as low as possible.

Le Velly (2007) briefly examines the conflicts which emerge in the setting of fair trade prices. The price, as set by FLO criteria, should cover costs of production, costs of convergence¹ and a profit to allow producers to improve their activities and standard of living. According to Le Velly (2007), this price should not take account of global production

1 Costs of convergence include the costs associated with achieving and maintaining certification and attendance at seminars and training.

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volumes or consumer market prices since the FLO strives to establish minimum prices independently of market forces. Le Velly (2007) also cites situations where the fair trade minimum price strategy is undermined. For example, in some cases, there are no minimum prices set for tea where the importer and producer negotiate a market price to which a social premium is then added, as determined by the FLO. Similarly, there are no minimum prices set for craftwork imported by EFTA members, where purchase prices are set on a case-by-case basis. Such prices take account not only of the costs of production but also of the products’ retail value in the North. As a result, some craft items are considered too expensive and are not traded despite potential gains from such developmental projects including greater empowerment of females within the community². In the case of other craft products a round of bargaining may be launched to get lower rates. “Consequently, it happens that the purchase prices paid by fair trade importers are the same as those paid by conventional trade buyers” (Le Velly, 2007, p8). The existence of these price setting activities within the fair trade model is difficult for many people to accept, notably proponents of free trade, since there is an expectation that fair trade embodies a minimum price, set above market levels.

However, for the majority of Fairtrade products a minimum price has been set based on the three costing factors discussed above. This process is praised for its inclusion of a social premium (Ronchi, 2002; Lyon, 2002) which is to be spent on projects decided by the producer cooperative or prevailing union. Often this premium is spent on improving health care and education provision or providing credit to farmers but may also be spent on improving infrastructure to make it easier for farmers to transport their produce. These improvements are especially beneficial for farmers in rural areas where the costs per

2 This is because it is predominantly females who produce craftwork

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kilometre may be high. Research by Oxfam in Uganda found that the cost of transporting a bag of coffee just 15km on rural roads to the local milling station was not much cheaper than transporting the same bag 100km along better roads from the milling station to Kampala (Oxfam, 2002, p35). Thus, the social premium allows investment in projects to help the whole community and it is this premium which creates the largest positive externalities from the fair trade system, as conventional trade producers also benefit equally from the improved roads, schools and health care. Indeed, the income generated by the premium can be substantial when one looks at aggregate numbers. In 2004, “out of US$100 billion consumers spent on fair trade products an extra income of almost US$100 on average was transferred to more than one million farmers” (Schmelzer, 2006, p17).

The fair trade floor prices were initially agreed in 1998 following field research into production and living costs and have, at time, been below the market price. Sixteen years after being introduced, despite inflationary changes and the disparities which exist between the production costs of different countries, the fair trade price had been raised only once (Lyon, 2006). Since 2006, prices have been reviewed by the Fairtrade Foundation and the minimum prices for the period up to October 2014 are outlined below and vary depending on the product (Fairtrade, 2014a)³;

 Arabica coffee (conventional⁴, natural): the minimum price paid to farmers’

cooperatives as valid from 1^st April 2011 is 135 cents/lb, including a 20 cents/lb premium. This is set against an average international price of 65 cents/lb in 2003, just over 120 cents/lb at the start of 2005⁵ and 212 cents/lb in 2014 (Coffee Prices, 2014a).

3 All prices are in US$

4 Conventional refers to products which are not organic

5 This was the first time in five years the world price had gone over 120 cents (Fairtrade, 2008a)

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 Robusta coffee (conventional, natural): receives a minimum price, valid from 1^st April 2011, of 110 cents/lb, including 20 cents/lb premium. The average international price was around 35 cents/lb in 2003, 51 cents in 2005 and 105 cents/lb in 2014 (Coffee Prices, 2014b).

 Cocoa (conventional beans): has a minimum price, valid from 1^st October 2012, of

$2,000/metric tonne, including $200/metric tonne premium. The international price fell to a 27-year low of $724 in 2000 but fears of a shortage saw prices surge to a 16-year high of $2000 in October 2002 (Fairtrade 2008a). The price has continued to rise to the current level of $3222/metric tonne (Cocoa Bean Prices, 2014).

 Bananas (conventional, fresh): have various export prices depending on the country of origin and market conditions. The minimum Fairtrade price paid to farmers in Ecuador, valid from 1^st January 2014, is $8.85/18.4kg including a $1.00 premium.

Conventional prices in Ecuador during 2002/03 fluctuated between $3.65 and $6.64 a box (Fairtrade 2008a) and more recently trade at $17.02/18.4kg (Banana Prices, 2014).

Dragusanu et al. (2014) examine the relationship between the guaranteed minimum price and the market price between 1989 and 2014. The comparison shows that despite market prices exceeding the minimum fair trade floor price in recent years, during price crashes such as 1989 and 2000, the floor price provides significant protection from risk for fair trade farmers.

It is difficult to calculate the additional income a farmer receives as a consequence of fair trade participation due to the various ways that cooperatives recoup debt repayments and

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combine fair trade and non-fair trade sales of produce. Given debt payments are sometimes taken out before payments are made to farmers or a proportion of produce is sold via conventional markets, the amount received may be lower than a simple output times price calculation would indicate. However, Murray (2003) found the “revenue for Fair Trade coffee to be twice the street price for conventional coffee, even after deductions were made for cooperative management and other expenses” (Murray et al. 2003, p7).