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# **I. Introduction**

## _Fairtrade_

Since the original Oxfam ‘Fairtrade’ shop opened in the UK in 1964, Fairtrade organizations trading in everything from textiles to coffee grew to achieve global retail sales of over US$83 million in 2003 (NEWS 2005). Agricultural commodities traded under Fairtrade auspices include coffee, cocoa, tea, rice, sugar, honey and fresh fruit. Fairtrade enjoyed average annual growth rates of 3.3% throughout the 1990s (EFTA 2001) and by 2005, the net value of all Fairtrade products sold in Europe had increased by over 150% (FINE 2005). Although the total value of Fairtrade accounts for little over 0.01% of global trade, Fairtrade continues to grow in importance in individual commodity markets, particularly that of coffee. Fairtrade coffee accounts for an average of 0.5% of the US market, the world’s largest coffee market (Raynolds 2004). Market share in some European countries is much higher: In 2005, roughly 6% of the Swiss coffee market was Fairtrade and in the UK, Fairtrade now accounts for fully 20% of the market (FINE 2005). The demand for Fairtrade coffee has consistently grown at a faster rate than that of conventional coffee for a number of years. This is as true for older markets in Europe (where annual average growth of the European Fairtrade coffee market was almost seven percent throughout the 1990s (Max Havelaar 1998), as it is for younger markets: The average growth rate of the Fairtrade coffee market is 65% and 47% for the Canadian and US markets, respectively, since the introduction of Fairtrade coffee in North America in 1998.

While clearly capturing the imagination of consumers, the advent of Fairtrade on the agricultural commodity scene can actually be traced to its concern for the _producer_ side of the market. The intervention of Fairtrade with commodity producers is based on a number of perceived market failures that are claimed to lower the return to farmers and expose them to a high degree of volatility. In this, the Fairtrade position is far from new: Commodity policy research has diagnosed, examined and prescribed policy in the face of falling and volatile prices for decades. This has been particularly true for the coffee market, which has known several crises since the 1960s. The most well-known interventions in coffee markets have been the supply retention schemes aimed at supporting and stabilizing prices through international commodity agreements (ICAs).

## _Fairtrade and Commodity Policy in Coffee_

The global causes for the most recent crisis in coffee, dating from at least the early 1990s, include structural changes to supply and demand. These factors, combined with the effective demise of (US and Brazil-backed) coffee ICAs in 1989, have led coffee commodity policy in new directions. In particular, much of the new policy is aimed at increasing the share of existing returns to coffee producers through improved efficiency and access to higher valued markets. The volatility issue is addressed with market-based price risk management tools. It will be seen that the effectiveness of this policy strategy depends critically on delivering the associated price risk management and marketing tools to producers. This delivery can be limited by the difficulty in reaching many small, non-organized producers. It can also be limited by imperfect market structures, where market power and failures in information can prevent higher returns from reaching farmers. Furthermore, whereas improved efficiency is touted by ‘new’ commodity policies as a means to alleviate the current crisis for farmers, it is