Putting Value Back in Price

Fairtrade International’s former CEO Harriet Lamb writes her final blog with Fairtrade, again calling on consumers and companies to pay a fair price to farmers and workers.

Oscar Wilde said a cynic is someone who knows the price of everything, but the value of nothing. If so, then we are living through a most dangerous and cynical age.

Think how much you value that first pick-me-up morning cup of coffee. Or those tasty, easy to mash and vitamin-packed bananas you feed to your baby. Or that gold wedding ring on your finger. Yet the price of those goods has no relation to their value to you, or to the actual costs for farmers, workers and miners.

In fact, pricing has become totally disconnected from the value of the product, and even from supply and demand. The restless search for ever cheaper prices has overlooked the people and indeed whole nations who depend upon them. The race for the quickest profits has turned the trade of products that are in essence the most valuable – food and drink, cotton for clothes – into a big game of chance – with highest earnings going to people most of whom have never been on a farm in their life.

Today, discussing pricing is a taboo topic. Companies throw up their hands in horror, and mumble about the competition authorities. Yet it is not that long ago that the International Coffee Organization (ICO) used a quota system to achieve a stable price, typically around US$1.20-1.40 per pound of coffee for most of the 1980s.

This system collapsed in July 1989 – the USA pulled out, no longer concerned about maintaining stability in the post-Cold War. Key coffee producing nations could no longer afford to smooth prices or manage coffee stocks. Instead of trying to fix the problems, the industry followed the global rush to liberalization. In most countries, stocks were released quickly and prices collapsed to 40-50 cents, well below what it actually costs farmers to grow and harvest coffee.

A very long period of crisis followed.

Entire communities were plunged into a state of emergency. Guatemalan coffee farmers can describe how they came down from the mountains, hungry, looking for work. In 2001, fourteen young Mexicans died crossing the desert into the USA – six were bankrupted coffee farmers.

The effects of this time are still felt in many places. Many farmers left the countryside forever. The lack of investment during so many years made productivity drop, left plants vulnerable to diseases. And prices have continued to fluctuate only ever more wildly.

Indeed, speculative investments in coffee have increased steeply since 1989. Coffee companies using the futures market are interested in price stability – but speculators can only make money if prices fluctuate, and the more the better. Since the 1990s ‘open interest’ contracts (exposed to price fluctuations) have quadrupled from fewer than 40,000 to 160,000 contracts daily. In 2014, the number of contracts that changed hands on the futures market in New York alone amounted to 1.999 billion bags of green coffee -14 times total world production.

New kids on the pricing block include the ‘index traders’ who are currently under fire in the US Senate for artificially increasing the price of commodities. Then there are the ‘flash traders’ – whizz kids who develop algorithms for automated programs to send buying and selling orders to the market in nanoseconds. Any link between the value of a product and its price is long gone.

So farmers need to be as good at price risk management as they are at pruning their trees.

But the futures market in New York is truly a world away. The way the coffee price is set every day is clouded in obscurity. Farmers struggle to understand how the price is actually set, believing it will rise when stocks are low pre-harvest, as in normal supply and demand, and as with other products they sell such as beans. They try holding back their crop in hopes that the price will go up, but often end up selling when the price has dropped. They live in hope that price will rise; in fear that it will plummet.

And this great disconnect is echoed over and again across the products you buy. Over the past ten years, UK supermarkets have almost halved the shelf price of loose bananas. In the same time period the cost of producing bananas has doubled, resulting in an ever-tightening squeeze on what farmers and workers earn.

For decades, the price of gold has been set every day in London by a small group of bankers in what is, unbelievably, called the London Fix. And last year, it was exposed as being exactly that – a fix, in which seven major financial institutions were alleged to be manipulating the price to earn unbelievable profits. Meanwhile, artisanal gold miners struggle in inhumane and dangerous conditions for $1 a day.

Fairtrade was born out of this pricing crisis, sparked in coffee and escalated into the unsustainable, hyper-capitalism we have today. For the last couple of decades we have continued to set minimum prices based on actual value of commodities, to build an appreciation for a product’s true cost, of the very least that farmers and workers and miners should earn.

This year research we commissioned showed that if all the companies buying from tea plantations in Malawi paid the equivalent of the Fairtrade Minimum Price plus the Fairtrade Premium, the country’s tea plantations would be able to afford to pay their workers a living wage, and small-holder tea growers could earn a living income. Imagine what an achievement that would be!

And so over the next five years, Fairtrade will focus on building wider support for pricing that covers living wages for workers and living incomes for smallholder farmers, as part of our 2016-2020 global strategy to be announced at the start of next year.

As for me, I will end my tenure in Fairtrade the same way I started it – calling for a fair pay to farmers and workers, and the end to unsustainable pricing. Almost 16 years ago to the day, I walked into the cramped attic office in Bonn of the then-tiny new movement called Fairtrade. The first task on my desk was reviewing the price for Fairtrade bananas.

A decade and a half later, we have built a movement supporting 1.5 million farmers and workers, and helped to put problems in trade onto the global agenda.

But the need remains as urgent as ever.

This week I will move from the front-lines of Fairtrade to cheering on the sidelines, as I take up my new position as Chief Executive of the peace-building organization International Alert. For 16 years I have been inspired by the farmers, workers and citizens ready to work together to put sanity back into prices, to transform the position of small-scale farmers, workers, and miners from being the most vulnerable to the most valued in the supply chain. And that, I am convinced, will play its own critical part in building the economic underpinnings of peace.