Fairtrade Certification | How Does Fairtrade Work?

In low-income regions, small-scale agriculture is the biggest source of income, job security and food security for around 70% of households. Although much of the world’s agriculture and food is supplied by small-scale farms, its producers and workers are often left vulnerable to higher levels of risk, imbalanced bargaining power and unfair trading practices.

What is Fairtrade?

Image Courtesy of Fairtrade Belgium

So what is Fairtrade exactly? The Fairtrade certification system was born out of a movement to end inequities in the trading market. The Fairtrade model requires companies to pay fairer prices to small-scale producers while also holding producers to higher ethical and environmental standards, which protect labourers’ rights and the environment. Fairtrade-certified products can range from cocoa, coffee, bananas, tea, herbs and more.

Today, Fairtrade International focuses on creating a framework with small-scale producers and workers in low-income regions. This framework gives them access to international markets, but more importantly, a stable income. To understand the impact of Fairtrade’s model, we first need to understand the unfairness of conventional trade systems today.

Problems with conventional trade

The trading system is complex and full of different actors and risks. Within trade, you have producers, buyers (like manufacturers, suppliers, or traders), transporters and distributors (for example, wholesale retailers or grocery stores) – each having their own risks, like pest infestations, transport availability, or food loss.¹ All these actors are exposed to the usual market risks of demand, price, etc. If each group has its own risks, what makes small-scale producers in low-income regions so much more vulnerable? 

1. Lack of market infrastructure 

Small-scale farmers are often exposed to uninsured risk, particularly if they are from poorer regions with less developed market infrastructure. They often lack access to information on market prices, demand, or even alternative trading channels. This already puts small-scale producers in a lower bargaining position with buyers, especially if they trade as individual smallholders with larger, more established buyers.¹

Within a globalised trading system where written contracts and conditions are commonplace, small-scale producers may face additional challenges enforcing agreements as they may be accustomed to a trade culture based on verbal agreements and interpersonal relationships.² Without written contracts, buyers can back out of pre-agreed sales without legal consequences, leaving the producer with an unsold perishable supply - lowering its value.

2. Production costs & risks 

Producing quality food in high quantities can be difficult and costly for small-scale producers. On top of the usual risks of drought, flood, hail, pest attacks and diseases, many smallholders still have production costs – whether it’s investing in land, pest deterrents, fertilizers, agricultural technologies and systems, or even hired labour if they don’t have enough helping hands in the family. These production costs only increase as producers adapt to problems caused by climate change, like increased water scarcity and natural disasters. It has an even stronger impact on smallholders, as they tend to have lower production volumes and slimmer profit margins.  

3. Price variation & volatile markets

While production costs grow, small-scale producers have additional pressure from a volatile market - products may have higher demand and market prices one month but then drop in demand and price in another. These fluctuations ultimately affect the revenue of small-scale producers, whether for better or worse. When it’s for the worse, small-scale producers are often financially impacted more intensely than other actors in the trading system.¹ Sometimes, market prices even drop below production costs. This means a loss for small-scale farmers, and many producers already live in poverty.  

Such strained finances and resources consequently impact farmworkers and labourers, whether in the form of unfair pay, illegal labour, or bad working conditions (such as long working days and poor hygiene conditions). 

So, how is the Fairtrade certification system different?

The Fairtrade certification system is ultimately designed to protect small-scale producers and workers from exploitative trade behaviour while empowering them to improve their own economic standing through a fairer framework. But how exactly does it work? 

Photo Credit: Khan Vito Coconuts / Fairtrade Australia & New Zealand

Working together, not in isolation

Small-scale producers, on their own with just a few hectares of land, can find it challenging to access global markets. Under the Fairtrade model, farmers group together to organise into local ‘cooperatives’, strengthening their bargaining power in trade negotiations. The cooperatives have a democratic system, and decisions are made together based on majority voting. This concept is not far from classic labour unions, in which organized labour groups have a wider influence over their wages and working conditions through collective bargaining power. 

So by combining all those producers and organising them in a cooperative, it actually makes them a lot stronger. A lot stronger to trade, but also a lot stronger to develop their agronomical practices and to develop their communities, because organising farmers in cooperatives also enables them to, for instance, build schools and clinics, sometimes even construct roads. Those are all real examples that happen in the Fairtrade family. The Fairtrade impact already starts before any trade is made.

 - Peter d’Angremond, CEO of Fairtrade Netherlands.

Creating a fairer trade infrastructure

Within the certification system, you have Fairtrade-certified buyers and producers. To receive Fairtrade certification, both groups must abide by their respective Fairtrade standards. For buyers, their Fairtrade standards are set to ensure the protection of producers and include long-term contracts with smallholders and pre-harvest advance payments. This establishes a reliable framework and steadier relationships between smallholder farmers and their buyers or traders. 

Read how Fairtrade sets its standards.

Setting fair and sustainable prices

Perhaps what’s most unique about the Fairtrade system is their ‘minimum price’ and additional ‘premium’ payment model, which aim to counteract the impact of volatile markets on small-scale producers. Fairtrade-certified buyers must pay farmers a minimum price for their products or the current market price – whichever is higher. Different products have different minimum prices, all of which are voted on and set together with Fairtrade producers (who own 50% of the Fairtrade organisation). 

Investing in the local community

On top of the minimum price, buyers must also pay ‘Fair Trade Premiums’. Each product has its own respective premium amount, and they serve as additional funds to be invested in the community (roads, schools, water pipes, for example), business operations (like training and resources). This money is put in a pot for smallholder cooperatives to democratically vote on what and how they want to invest the premiums. 

All transactions between Fairtrade producers and buyers must be recorded in the form of a contract. These transactions are regularly audited by a third party to ensure that producers have been fairly paid the minimum price and premium on their products. 

But does Fairtrade benefit farm workers?

Image Courtesy of Fairtrade International, Photo Credit: CLAC

You may have noticed that we’ve only discussed how Fairtrade impacts smallholder farmers. What about its impact on farmworkers? Labourers are the most marginalised group in the food chain, earning the lowest income and are often subject to unfair working conditions. Does the Fairtrade system also work to empower them?  

Yes, Fairtrade also has certification standards for its producers – whether smallholder farms or larger estates and plantations – and are designed to hold them accountable to responsible social and environmental criteria. In addition to following national labour and environmental laws, Fairtrade standards also include:

• No abuse or violence of any kind (including verbal)
• No discrimination against any member or social group for employment
• Pay rates equal to or higher than legal and regional minimum wages
• Prohibited use of illegal labour, forced labour and child labour
• Prohibited use of hazardous material
• Prohibited use of genetically modified organisms (GMOs)

Fairtrade certification of larger estates and plantations is for very specific products (like banana plantations and tea estates), while certification of other products (like coffee and cocoa) is restricted only to smallholder cooperatives. Audits are regularly conducted by FLOCERT, a third-party independent auditor, to ensure that all producers meet Fairtrade standards. While Fairtrade encourages development and gives opportunities to address unmet standards, any producer organization or trader that violates major core requirements (e.g. illegal labour) will be suspended or decertified. 

Protecting workers’ rights

It’s important to note that small-scale farms in low-income regions are typically owned and worked by families.³ On occasion, larger smallholder farms may hire workers, but rural communities often rely on social relationships (like relatives and neighbours) for additional help. This work is usually informally agreed upon and may lack formal contractual services. 

On plantations or estates, however, workers are typically hired to work and manage the crops. This is where Fairtrade standards create an infrastructure to protect and empower hired labourers. Fairtrade-certified plantations or estates must have contracts for hired workers, allow their workers to unionise to bargain for their rights collectively, and meet Fairtrade standards for worker health and safety (in addition to all the social criteria listed above).

Fairtrade premium for workers

Fairtrade Premiums are also reserved for hired labour on Fairtrade-certified plantations or estates. The premiums are usually given to a joint committee on the plantation, which is managed by the workers. Workers can collectively decide what to do with the premium – without any say or intervention from the plantation owner. Specifically, for hired labour, these premiums can be used to supplement pay as additional wages, as often there can be a gap between the paid minimum wage and living wage.^7,8,9

“Living wage is not the same as minimum wage. A lot of countries use a minimum wage level, but it might just not tip. The point of a living wage is a wage that is based on the cost of living: what is the cost of decent housing, decent food, decent education, access to medical care, and transportation? That, all together, builds a living wage. And we are very much geared to reach the living wage level for workers. If there is a gap between current wages paid and living wages, then the supplement might close that gap,” explains Peter d’Angremond (Fairtrade Netherlands).

Image Courtesy of: Fairtrade Africa, Photo Credit: Francesco John Mpambe Jnr

The big question: Does Fairtrade work?

Today, the Fairtrade system is comprised of over 1.7 million farmers and workers worldwide and has over 35,000 Fairtrade-certified products. Since 2014, Fairtrade farmers and workers have received over half a billion euros in Fairtrade Premium. Some studies have shown that Fairtrade certification has benefited certain smallholder communities, like greater enrollment in high school in Costa Rica, but has no effect on unskilled workers in the same region.⁴ 

Read Does Fairtrade Really Work?

Another study on Colombian coffee chains has also shown that Fairtrade farmers receive a higher share of revenue and that Fairtrade premiums significantly affect the development of social projects. But the same study also found that the effectiveness of Fairtrade varies enormously, depending on how much coffee is sold and in which regions.⁵ This is because certified producers only receive a minimum price and premium for the percentage they’re able to sell to Fairtrade-certified buyers. If there are not enough certified buyers, producers often sell their products to non-certified buyers under the conventional trade system. The same can be said across different Fairtrade products, and the impact of the certification on different producers and workers around the world. 

Fairtrade alone cannot meet the scale of the challenges posed by climate emergencies and the inequality in value chains; the current global economic system urgently needs to be transformed.

 – Fairtrade International

One thing is clear: Fairtrade has an impact. The movement has been gaining traction, with more consumers and companies committing to buying fairly traded goods - increasing by 8.8 billion dollars in retail sales between 2004 and 2018.⁶ It has brought light to the pervading, deep-rooted problems of the trading system. And while it may not be the only solution for change, it certainly is one of many. 

Cover image courtesy of Fairtrade Africa / Francesco John Mpambe Jnr