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Fairtrade and market failures in agricultural commodity markets

Author

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  • Ronchi, Loraine
Abstract
This paper concerns an NGO intervention in agricultural commodity markets known as Fairtrade. Fairtrade pays producers a minimum unit price and provides capacity building support to member cooperative organizations. Fairtrade's organizational capacity support targets those factors believed to reduce the commodity producer's share of returns. Specifically, Fairtrade justifies its intervention in markets like coffee by claiming that market power and a lack of capacity in producer organizations'marks down'the prices producers receive. As the market share of Fairtrade coffee grows in importance, its intervention in commodity markets is of increasing interest. Using an original data set collected from fieldwork in Costa Rica, this paper assesses the role of Fairtrade in overcoming the market factors it claims limits producer returns. Features of the Costa Rican input market for coffee permit a generalization of the results. The empirical results find that market power is a limiting factor in the Costa Rican market and that Fairtrade does improve the efficiency of cooperatives, thereby increasing the returns to producers. These results do not depend on the minimum price policy of Fairtrade and therefore can inform on its organizational support activities. Finally, the results also suggest that producers selling to vertically integrated, multinational coffee mills face lower producer price'mark-downs'compared with domestically owned non-cooperative mills. This result contradicts the popular view that the increasing concentration of vertically integrated multinational firms accounts for a decline in producers'share of coffee returns.

Suggested Citation

  • Ronchi, Loraine, 2006. "Fairtrade and market failures in agricultural commodity markets," Policy Research Working Paper Series 4011, The World Bank.
    • Handle: RePEc:wbk:wbrwps:4011
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    Cited by:

    1. Suphanit Piyapromdee & Russell Hillberry & Donald MacLaren, 2014. "‘Fair trade’ coffee and the mitigation of local oligopsony power," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 41(4), pages 537-559.
    2. Gingrich, Chris D. & King, Emily J., 2012. "Does Fair Trade Fulfill the Claims of its Proponents? Measuring the Global Impact of Fair Trade on Participating Coffee Farmers," Journal of Cooperatives, NCERA-210, vol. 26, pages 1-23.
    3. Dreyer, Heiko & Anders, Sven M., 2014. "Experience matters - trade duration and survival of coffee exports," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182758, European Association of Agricultural Economists.
    4. Leonardo Becchetti & Stefano Castriota, 2008. "Is Fair Trade Honey Sweeter? An empirical analysis on the effect of affiliation on productivity," Working Papers 104, ECINEQ, Society for the Study of Economic Inequality.
    5. Leonardo Becchetti & Stefano Castriota & Melania Michetti, 2013. "The effect of fair trade affiliation on child schooling: evidence from a sample of Chilean honey producers," Applied Economics, Taylor & Francis Journals, vol. 45(25), pages 3552-3563, September.
    6. Brigitte Granville, 2009. "Trust In Fairtrade: The 'Feel-Good' Effect," Working Papers 27, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    7. Andreas Graichen, 2008. "Fairtrade Labelling in a Bertrand Competition Model with Monopsony Power," Working Papers 050, Bavarian Graduate Program in Economics (BGPE).
    8. Ana C. Dammert & Sarah Mohan, 2015. "A Survey Of The Economics Of Fair Trade," Journal of Economic Surveys, Wiley Blackwell, vol. 29(5), pages 855-868, December.
    9. Balineau, Gaëlle, 2013. "Disentangling the Effects of Fair Trade on the Quality of Malian Cotton," World Development, Elsevier, vol. 44(C), pages 241-255.
    10. Barham, Bradford L. & Callenes, Mercedez & Gitter, Seth & Lewis, Jessa & Weber, Jeremy, 2011. "Fair Trade/Organic Coffee, Rural Livelihoods, and the "Agrarian Question": Southern Mexican Coffee Families in Transition," World Development, Elsevier, vol. 39(1), pages 134-145, January.
    11. Alexis H. Villacis & Jeffrey R. Alwang & Victor Barrera & Juan Dominguez, 2022. "Prices, specialty varieties, and postharvest practices: Insights from cacao value chains in Ecuador," Agribusiness, John Wiley & Sons, Ltd., vol. 38(2), pages 426-458, April.
    12. Alastair Smith, 2009. "Fair Trade, Diversification and Structural Change: Towards a Broader Theoretical Framework of Analysis," Oxford Development Studies, Taylor & Francis Journals, vol. 37(4), pages 457-478.

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