Fairtrade vs direct trade coffee - explained

March 31, 2020
Kristina S

As a coffee lover, you have probably heard about Fairtrade and Direct trade coffee, and there is a lot of debate surrounding which is better.

In order to dispel some of the myths, we wanted to explain the difference between the two, and the pros and cons of each.

The problem
In a world of free market economics, the price of a commodity such as coffee is determined by its supply levels versus the level of demand for it. If the supply level is higher than the demand for it, the price generally reduces, however, when the supply falls, and demand exceeds the supply, the price will go up as buyers are prepared to pay more for it.

The problem with this is that when supply becomes too high, prices will fall, and large buyers using their purchase power are able to push prices even lower. This affects the farmer adversely as falling prices mean falling profits and falling wages. As most farmers are small rural businesses, this can seriously affect the livelihoods of these communities.

Fairtrade
In order to address some of these disparities, Fairtrade practices were developed by an organisation called Fairtrade International who promote fair pay and ethical treatment to coffee producer groups.

In order for coffee to be certified as Fairtrade, a coffee producer must first apply for certification (which requires paying a fee) in order to obtain a license. Once the producer completes these steps, they are introduced to and marketed to a large consumer base through being able to display the famous Fairtrade logo on their products. The producer then effectively acts as an exporter of the coffee if selling to international markets as is usually the case.

Fairtrade importers must also register with Fairtrade International and pay a fee. When purchasing coffee from the producer or exporter, the importer is required to pay the market price for the coffee, but importantly, a further minimum additional premium on account of being part of the Fairtrade movement. This adjusted price ensure that the producers are receiving a price that is higher than the usual free market price for their coffee.

The downside to this is that as Fairtrade requires the buyer to pay an increased price, when in a market with an oversupply of coffee, the producer/exporter often loses out anyway due to having to pay extra license fees to Fairtrade International, and a lowered market price. Quality may also suffer as the farmer stops being incentivised to produce coffee at a good quality when they know the price will be low anyway.

The case for Direct trade
Direct trade coffee is a type of sourcing where the roaster or distributor buys directly from the farmer, without the involvement of any third party such as Fairtrade International, or importer organisations. This means that the farmer can set their own price for their coffee, and not be forced to accept the lower market price.

This results in higher profits for the farmer, higher wages for workers, and more investment in the local communities. In the longer term, the farmers are able to invest more into their coffee processing methods and produce a higher quality coffee when they know they will be able to command a better price for it. Overall this increases sustainability on both sides of the equation.

As Don Maslow Coffee works with very small producers for whom registering with Fairtrade International is not economically viable, we use the Direct trade methodology and as a result, the price we pay for our coffee is higher than the Fairtrade rate. This naturally results in a slightly higher price for our customers, but our business is built on the principle that our coffee must be of the highest quality, and must also pay our producers well so they can invest back into their communities. This is at the heart of what we do, and we hope that our customers will also buy into this important principle.