Organic Fair Trade Price Discrimination
I was all set to write a large post about my feeling on Fair Trade products such as coffee and organic produce but I can see that far smarter people then I am have already weighed in on the less then stellar results of these marketing ploys. It turns out that only small amounts of the huge premium paid for fair trade products gets to the poor third world producers …
I like the idea of paying a few cents more for my cup of joe, but I will not pay one red cent extra for a middle-man to provide me that ‘fair-trade’ coffee. It doesn’t cost the middle man a large sum of money top provide ‘fair-trade’ coffee in place of normally grown coffee. To the middle man, the coffee should be just another variety of product. How do we pay the farmer more without a majority of the premium getting skimmed by the middle man?
The organic movement is also bugging me a lot lately. In our recent trip to Mendoncino, California it was near impossible to find a restaurant that did not offer completely organic product in their meals. Granted, Mendocino is a hippie town, but it is unbelievable that more restaurants didn’t have at least some menu items without organic products. Even the ketchup was organic (the only non-organic product I noticed was the Cholula Hot Sauce I requested for my Tacos de Pescado / Fish Tacos ). Many people make the claim that organic products taste better. The only way that could be possible is if you play mental games with yourself in order to believe that this is the case. With a lack of state of the art fertilizers and farming technology not certified organic I highly doubt this to be the case. I suspect a double blind taste on farm product grown on neighboring farms (one organic, one not) would result a negation of the theory that organic products ‘taste better’. I would love to have the choice of having a plate with organic products or without. But alas, I know why this isn’t an option…most people can’t tell the difference and they will not pay a premium price for something of little or no value to their taste buds. So the restaurant would not be able to charge above market rents for a questionably better product.
I am contemplating going my own salsa garden next summer. Maybe I can get my backyard certified organic. Then I can go to the local framers market where people with entirely too much money will pay $20 for a jar of organic fair trade locally grown hand made chip dip.
Update I: Thanks for the link Josh Finnie!
Update II:There has been some interesting comments poppong up about this subject…
A. Pimera notes
IMO Vegetables and fruits in most of Europe taste much better than American ones. They use fewer chemicals over there and organic farming is more mainstream. Tomatoes in the states are disgusting.
which prompted Kyle at economize this to respond…
keep in mind that European agriculture policy heavily subsidizes farming. so the quality may be higher, or more organic or grown on a family farm, but there is still a higher cost and major market distortion. And is that “fair†to other trading partners? Is that “fair†to consumers who have to pay taxes and then purchase high priced goods that were subsidized with these same tax dollars (when they might be just as happy with lettuce from Africa)?
The discussion of any food related topic always seems to produce (no pun intended) many interesting lines of arguments. The subjective arguments are often the most fun, due to the lack of a true answer to the discussion. I like it!!!
Update III: The Adam Smith Institute found this quote from Bob Geldof about European Farm Subsidies….
“The CAP is a protection racket Al Capone would look at in admiration and be proud of. Why do Europe’s farmers need protection? Farmers are being paid to look after fields - they are just gardeners. Some are growing stuff through subsidy that we don’t even need - then we are paying more taxes to store the stuff we don’t need and more taxes to destroy the stuff we don’t need. The CAP was responsible for the butter mountains and the wine lakes. These surpluses are also being shipped out to Africa and destroying local markets and economies. It is not giving people a chance to get back on their feet. The CAP should be scrapped and farmers should be open to competition. We’re not a free market. There is no free trade. The CAP is anti-free trade.”
“CAP is killing people. Africa is only eight miles down the road from Europe and it is inconceivable that there is starvation and poverty there while huge amounts are wasted across Europe on farming subsidies. Europe gives 65 cents -just over half a euro -to the average poverty-stricken African in aid in a year, whereas a surplus cow in Europe gets 848 euros a year.”
Thanks to MR for the pointer.
on January 4th, 2006 at 10:23 pm
There is one thing that organic foods have over non-organic. That is, you can often get ethnic or speciality items only as organic, so in that way I often find myself willing to pay a premium for them. So in a way, the organic movement creates new options: not only can I get an organic/free range chicken if I prefer it to Tyson, but I can get roasted olive habanero salsa that is such a specialty item that the major companies don’t make it. In fact, a few years ago I could only find organic hummus (for an assload of money), but now I can find non-organic, so this would be an example of organic companies pioneering a market that may not have developed otherwise.
on January 4th, 2006 at 10:53 pm
May be true, but I am sure if you went to a Middle Eastern or Greek food mart (assuming there is one of those in Muncie, In.) you will find that Hummus in its non-organic form at a reasonable price, and would have been able to for years. But I grant your argument as a valid one.
I just don’t think the exorbitant price charged for these marginally differentiated products is worth it. If I want roasted olive habanero salsa and it is only available for $10 a jar at the local Whole Foods…I would rather roast the olives myself and put them in a jar of my favorite $4 a jar roasted habanero salsa from Safeway…but that’s just me.
By the way, thanks for the salsa idea…I will have to make some next summer from my garden (I’ll have to buy the olives, unless olive trees grow quickly in a few months).
On a side note … I prefer to buy free range chickens and eggs, ceteris paribus, I might even pay a little more towards their purchase price. But this preference is not based on taste, and if the price were double I would not purchase the product.
on January 5th, 2006 at 2:54 am
IMO Vegetables and fruits in most of Europe taste much better than American ones. They use fewer chemicals over there and organic farming is more mainstream. Tomatoes in the states are disgusting.
on January 5th, 2006 at 7:07 am
It is interesting to take this conversation outside the realm of coffee, which is the only thing I am an expert at, it seems. When I was at Northeastern, I shopped at Whole Foods (or something similar) since it was closer to campus than Big Y, so I experienced the premium paid for organic food. And I have to agree with you Chris! I cannot justify it on a regular basis, though I never went to the extent of modifying cheaper food to fit the organic counterpart.
The quote from above from Philip Oppenhiem is what I am really worried about. There is a stigma surrounding market prices in third world countries because people can’t grasp that a dollar a day from Nike is more than they would ever make without Nike’s presence. So the Fair Trade emblem is paraded around like something that is going to eliminate poverty.
I buy Starbucks coffee or Andy’s roasted olive habanero salsa and pay that premium, but is Starbucks now better off or the people who grew these organic olives? I believe Starbucks is coming away the winner, they have to be.
on January 5th, 2006 at 7:20 am
[…] ll. Chris Silvey has a wonderful article on Fair Trade prices that extends outside coffee (link) so I thought I’d share my thoughts. The following quote taken from Marginal Revolution states: ̷ […]
on January 5th, 2006 at 8:14 am
A. Primera, I agree that store bought tomatoes in the US taste horrible. That is a function of US consumers only buying beautiful produce…so the growers raise crops that transport hundreds of miles whi le still having the appearance of a magazine quallity fruit. But I will put my homegrown (non-organic) tomatoes from the back-yard or tomatoes purchased in season at the local farmers market up against any tomato in the world. Organic has nothing to do with it.
on January 5th, 2006 at 11:15 am
A. primera - keep in mind that European agriculture policy heavily subsidizes farming. so the quality may be higher, or more organic or grown on a family farm, but there is still a higher cost and major market distortion. And is that “fair” to other trading partners? Is that “fair” to consumers who have to pay taxes and then purchase high priced goods that were subsidized with these same tax dollars (when they might be just as happy with lettuce from Africa)?
All that being said, the potatoes here are definitely better, among other vegetables.
on January 6th, 2006 at 1:31 am
Don’t get me wrong. I almost never buy organic foods because I don’t want to pay that much. And I agree that the European agricultural market is severely distorted. But keep in mind that the same is true in the US! This is just my gut feeling, but it seems to me that subsidies in Europe support a way of life for many small farmers (inefficient as it may be), whereas US subsidies go almost exclusively to agrobusiness.
What if (more expensive) European produce is also more nutritious? Would this lead to positive externalities that we are unable to measure? A healthier population requires fewer medical expenses. Strict environmental rules in Europe prevent fertlizer from poisoning or salinizing water. I know for a fact that the San Joaqin river basin in Central California has been severely polluted. I’m sure this is not the only example in the US.
American potatoes are larger but I don’t like their taste as much as the German ones.
on January 8th, 2006 at 12:47 pm
I may be lucky cuz I live in SoCal, but I usually don’t feel I have to choose between affordable produce and organic produce. My strategy’s to go to places that DON’T tack on an exhorbitant premium on organic and fair trade products. Trader Joe’s, for example, cuts out the middlemen AND delivers the savings to customers — which is why I can get a v. yummy bottle of organic tempranillo there for a mere $6!
The other thing we as consumers need to do, I think, is to call companies on this practice of unfairly jacking up prices. For ex., a few years back, a bunch of activists complained to Borders (which had its own coffee line then) about the over-pricing of their fair trade blend. Borders then “corrected” the discrepancy, bringing the prices in line with the other, “conventional” coffees. Even Starbucks’ fair trade blend — Cafe Estima — is priced for under $10 an lb, making it one of the mermaid’s cheaper coffees.
I’m willing to pay a little more for organic and fair trade, but like others have said, I simply CAN’T pay twice as much for the stuff. Luckily, I don’t feel I have to make that choice for the most part — and when I do, I either go elsewhere or complain loudly….
on January 11th, 2006 at 11:16 am
I find all this talk about the inequity of having the middleman charge a premium on fair trade goods rather interesting. It seems that you’re implying that the mark-up in price should only be enough to offset the cost. Of course, economic theory also suggests that, ceteris paribus, increasing the price will decrease the quantity demanded thus diminishing profit (assuming elastic demand… ). I’m unfamiliar with the numbers behind pricing data in any of the fair trade markets and while it may seem the right thing to do it also doesn’t seem wholly reasonable to assume that any of the middlemen would willingly diminish their profit. Organizations are supposed to be profit maximizers right? What do you think?
on January 11th, 2006 at 12:31 pm
Adam,
As a consumer I do want the mark-up price to be as close to cost as humanly possible. I might be willing to pay more, and may buy the same amount of product at a higher price…but I always want a normal good’s price to be as close to cost as possible.
Of course middle men will not willingly diminish their profit; they are horrible profit-maximizers if they do. The problem is in the long-run…not the short run. In the long-run other distributors will see the profits being made and will want to have some of those profits for themselves. They will enter the market and increase the supply. This will result in a squeezing of profits (in a perfect market with unlimited competitors…) leading to an eventual elimination of profits (or in the ‘real world’, a severe reduction in the amounts of profit). I might be willing to pay for the perceived value of an organically grown product…but I am not willing to pay for the identical transportation costs of said product.
on January 12th, 2006 at 2:04 pm
Keeping the intellectual jousting going…
You present an interesting point about how in the long-run theoretical profits after accounting for opportunity costs should go to zero. Here’s the point I was trying to make: Fair trade coffee is more expensive then non-Fair trade coffee (otherwise this whole thing wouldn’t be an issue) as a result of the additional compensation that goes to farmers. This distinction also allows us to view them in seperate markets (although still close substitutes from the consumers perspective). If they share common demand then the higher cost of fair trade coffee would imply higher prices and lower quantities sold in both the short run and the long run. If the increase in price only accounts for the increase in cost of fair trade coffee, in the short run, then it’s necessarily implied that producers will have lesser profits in the short run and in order to have an incentive to produce fair trade coffee the increase in price must exceed the increase in cost. This is factored into calculations in the long run as opportunity costs. That is, producers who transact in fair trade coffee, in the long run, could be using their resources for non-fair trade coffee instead which would result in higher quantity sales. This opportunity cost still implies a mark-up in price above cost (even in the long run). Of course, this argument is all contingent upon demand and cost structure in the seperate markets. I believe it’s reasonable to assume that the two brands of coffee are rather close substitutes in the aggregate.
I’m still confused about your e-mail. I guess I’m trying to lend an argument as to why the phenomenon might be happening assuming the markets are operating efficiently (a positive argument) while I guess you’re arguing how the market SHOULD be operating (a normative argument). That might be an important distinction.
on December 4th, 2006 at 7:06 pm
Economic analysis often lacks a human touch, and in Adam’s case he might try to integrate fairness into a consumer utility function.
Why buy fair trade when there is a substitute that tastes the same and might even be of higher quality? because in doing so I gain satisfaction from believing that a farmer might gain a few pennies from the fourteen dollars I just paid for the pound. Fairness: economize that.
invisible hand spanks ass.