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The Effects of Fair Trade Certification: Evidence From Coffee
Producers in Costa Rica*
Raluca Dragusanu†^ Nathan Nunn‡
21 December 2017
Abstract: We examine the effects of the Fair Trade (FT) certification of coffee on producers and households in Costa Rica. Examining the production dynamics of the universe of Costa Rican coffee mills from 1999 – 2014 , we find that FT certification is associated with a higher sales price, greater sales, and more revenues. As expected, these effects are greater when global coffee prices are lower and the FT guaranteed minimum price is binding. Looking at households, we find evidence that FT is associated with higher incomes for all families, but especially for those working in the coffee sector. However, we also find that, within this sector, the benefits are not evenly distributed. Farm owners and skilled workers benefit from FT, intermediaries are hurt, and hired unskilled workers are unaffected. Thus, although FT creates sizable benefits (on average), it also results in a redistribution from intermediaries to farmers. Lastly, we also find evidence of positive effects of FT certification on the education of high-school-aged children, which is most likely due to the presence of scholarship programs that are funding by FT premiums. Keywords: Fair Trade, poverty, education.
JEL Classification: F 14 , F 63 , O 13 , O 54.
*We thank Marco Antonio Martinez del Angel and Stephanie Cappa for excellent research assistance, Eduardo Montero for helping to facilitate our field visit in Costa Rica, and ICAFE Costa Rica for sharing their data. We alsothank Laura Alfaro, David Atkin, Dave Donaldson, Erica Field, Marc Muendler, Ben Olken, Nina Pavcnik, Andrea Podhorsky, and Christian Volpe, as well as seminar participants at MIT, the IADB, the LACEA-IDB TIGN Annual Conference, and the NBER ITI Summer Institute for valuable comments. † ‡Harvard University, (email:^ raluca.dragusanu@gmail.com) Harvard University, NBER and BREAD. (email: nnunn@fas.harvard.edu)
1. Introduction
Fair Trade (FT) certification aims to offer ethically-minded consumers the opportunity to help lift producers in developing countries out of poverty. The appeal of Fair Trade is reflected in the impressive growth of Fair Trade certified imports over the past two decades. Since its inception in 1997 , sales of Fair Trade certified products (under Fair Trade Labelling Organization (FLO) International / Fairtrade International) have grown exponentially. Today, there are over 1 , 200 FT-certified producer organizations worldwide representing over 1. 4 million FT-certified farmers and workers, located in 74 different countries (Fairtrade International, 2014 ). Despite the rapid growth and pervasiveness of FT products, well-identified evidence of the effects of FT certification remains scarce (Dragusanu, Giovannucci and Nunn, 2014 ). The question remains: does Fair Trade really work? This study attempts to help answer this question by estimating the effects of FT certification within the coffee sector in Costa Rica. Fair Trade uses two primary mechanisms in an attempt to achieve its goal to improve the lives of farmers in developing countries. The first is a minimum price that is guaranteed to be paid if the product is sold as FT. This is meant to cover the average costs of sustainable production and to provide a guarantee that reduces the risk faced by coffee growers. The second is a price premium paid to producers. This premium is in addition to the sales price and must be set aside and invested in projects that improve the quality of life of producers and their communities. The specifics of how the premium is used must be reached in a democratic manner by the producers themselves. The primary issue one faces when attempting to convincingly identify a causal effect is the fact that certification is endogenous. The primary concern is that mills may become certified when they also obtain a lucrative long-term contract from a large buyers like Starbucks. To gain a better understanding about the nature of selection into certification, in August of 2012 , we visited four FT-certified coffee mills to collect information on the factors that cause mills to become FT certified. We found four important determinants of certification in our setting. First, many mills in Costa Rica also operate stores that sell agricultural products, including certain pesticides that could not be sold if FT certified. Thus, mills that obtain greater revenue from selling banned chemicals are less likely to certify. Second, mills that forecast lower prices in the future perceived a greater benefit from Fair Trade’s price floor, and thus were more likely to join. Third, individual
We then turn to the broader effects of FT certification, using household-level survey data. We link the certification of cooperatives to households by constructing a measure of the share of exports in a canton (an administrative region in Costa Rica) and a year that is from FT-certified producers. This allows us to examine the relationship between this measure and household incomes. Since one of the explicit goals of FT is to set aside funds for community projects, it is likely that households not directly involved in coffee production, but living in the same canton, may also benefit from an increase in Fair Trade certification. Thus, our regressions also allow for the presence of spatial spillovers by estimating the effects of FT certification on all households in a region, including those not employed in the coffee sector. All empirical specifications examine household-level data collected annually from 2001 – 2009. The regressions, which are at the household level, include canton fixed effects, year fixed effects, and the following controls for characteristics of the household head: occupation, industry of employment, age, gender, and education. We find evidence of sizable positive spillovers. Those not employed in the coffee sector, but living in cantons during years with more FT certification, have higher incomes. Although the spillover effects are smaller in magnitude than the direct effects, they are still sizable. For example, one-standard-deviation increase in FT-certification intensity is associated with a 3. 5 % increase in the average income of all individuals in the canton. We also find additional benefits for those who work in the coffee sector, although there is significant heterogeneity. On average, greater FT certification leads to an increase in income to those in the coffee industry (beyond the spillover benefits described above). This increase is concentrated among skilled coffee growers, who account for 43. 5 % of those employed in the coffee sector. For this group, a one-standard-deviation increase in FT-certification intensity is associated with a 7. 7 % increase in average incomes (in addition to the 3. 5 % felt by all). The unskilled workers, who comprise 49. 8 % of those in coffee sector, do not receive any additional benefits (beyond the benefits felt by all). Those working in non-farm occupations in the coffee sector (e.g., intermediaries and others who are responsible for transportation, storage, and sales), and who account for 6. 7 % of those in coffee, are hurt significantly by FT. For this group, a one-standard-deviation increase in FT intensity is associated with a 3. 9 % decrease in average incomes (net of the positive spillover effects). Since non-farm workers have incomes that are approximately 50 % higher than the skilled farmers, a result of FT is that it decreases income inequality within the coffee sector by transferring rents from
intermediaries to farmers. This is one of the stated goals of Fair Trade in general. Motivated by the fact that within Costa Rica, cooperatives commonly use FT premiums for the building of schools, the purchase of materials, and the provision of scholarships, we also examine the effect of FT certification on education as measured by the enrollment of school-aged children. Our estimates show that FT certification has no effect on the enrollment of elementary-school children (aged 7 – 12 ), a result that is not surprising given that elementary-school enrollment rates in Costa Rica are close to 99 %. However, we find that FT certification is associated with higher school enrollment for high-school students (aged 13 – 17 ). This is true both for children whose parents work within coffee and whose parents do not. According to the estimates, a one-standard- deviation increase in FT-certification intensity is associated with a 2 – 5 percentage-point increase in the probability of school enrollment. Consistent with the estimated effects of FT on the incomes of non-farm workers (e.g., intermediaries, etc) in the coffee sector, we find that the enrollment of their children is adversely affected by FT. A one-standard-deviation increase in certification is associated with a XX percentage-point decline in high school enrollment. Our findings complement a small number of existing studies that attempt to identify the causal effects of FT. Most existing studies rely on cross-sectional comparisons from moderate sized surveys. For example, Mendez, Bacon, Olson, Petchers, Herrador, Carranza, Trujillo, Guadarrama-Zugasti, Cordon and Mendoza ( 2011 ) compare 469 households from 18 different cooperatives in four Latin American countries, Bacon ( 2005 ) compares 228 coffee farmers from Nicaragua, and Weber ( 2011 ) surveys 845 farmers from Southern Mexico. All three studies observe one cross-section. A number of studies have used matching techniques to obtain more credible causal estimates from cross-sectional data. These include Beuchelt and Zeller ( 2011 ), who examine 327 farmers in Nicaragua, and Ruben and Fort ( 2009 ) and Ruben and Fort ( 2012 ), who study 360 farmers from six coffee cooperatives in Peru. Our estimates complement and improve upon the existing evidence in a number of ways. First, rather than relying on cross-sectional comparisons, we provide estimates based on changes over time. For example, our mill-level analysis is based on an estimating equation that include mill fixed effects (as well as time period fixed effects). The mill fixed effects absorb average differences between the mills in our sample. Therefore, unlike existing studies, our estimates are not derived from cross-sectional differences. We also complement the existing evidence by testing for spillover benefits of FT. Given that an intended goal of FT is to improve the economic conditions of local
enrollment of children. Section 5 concludes.
2. Background
A. Fair Trade Certification
Fair Trade has its origins in an initiative started in Netherlands by a church-based NGO in 1988 in response to low coffee prices. The stated aim of the initiative was to ensure growers were provided “sufficient wages”. The NGO created a fair trade label for their products called Max Havelaar, named after a fictional Dutch character who opposed the exploitation of coffee pickers in Dutch colonies. Over the next half decade, Max Havelaar was replicated in other European countries and in North America. As well, similar organizations, such as TransFair, emerged. In 1997 , various labeling initiatives formed an umbrella association Fair Trade Labelling Organization International (FLO), and in 2002 , the FT Certification mark was launched. The stated goal of Fair Trade is to improve the living conditions of farmers in developing countries. In practice, this is accomplished through two primary mechanisms. The first is a guaranteed minimum price for all coffee that is sold as Fair Trade, which is set by the Fair Trade Labelling Organization (FLO). The minimum price is meant to cover the average costs of sustainable production and to provide a guarantee that reduces the risk faced by coffee growers. FT buyers must always pay producers at least the minimum price regardless of what the market price is at the time. Currently, the minimum price (for conventional Arabica washed coffee) is set at $ 1. 40 per pound. For organic coffee, it is $ 0. 30 more, and for unwashed coffee it is $ 0. 05 less. The relationship between the minimum FT price and market prices between 1989 and 2014 is shown in Figure 1 , which is taken from Dragusanu et al. ( 2014 ). As shown, for a significant portion of the past 25 years the price floor has been binding. In addition, for much of our sample period, which starts in 1999 , the price floor has been binding. The second component of FT is a price premium that is paid to producers. The premium, which is currently set at $ 0. 20 per pound, is in addition to the sales price and must be set aside and invested in projects that improve the quality of life of producers and their communities. The specifics of how the premium is supposed to be determined in a democratic manner by the producers themselves. Potential projects that could be funded with the FT premium include the building of schools and health clinics, offering instruction courses to members of the community,
as Fair Trade is indeed sold as such. Just producing and certifying a product does not guarantee that a buyer will purchase it as Fair Trade and provide the associ- ated benefits and price. The relationship between the guaranteed minimum price and the market price between 1989 and 2014 is shown in Figure 1. Although in recent years, the market price of coffee has usually been higher than the Fairtrade minimum price, data from the price crashes of the late 1990s and early 2000s indicate that the price floor can provide significant risk protection to farmers who sell their coffee as Fair Trade certified. 2) Fair Trade premium. Another important characteristic is a price premium, often termed the community development or social premium. This is paid by the buyer to the supplier or cooperative organization in addition to the sales price. Prior to 2008, for coffee, this premium was set at 10 cents per pound but is now 20 cents per pound with 5 cents earmarked for productivity improvement. The premium is designed to foster the associativity and democratic process that are tenets of the Fair Trade philosophy. The specifics of how the premium is to be used must to be decided in a democratic manner by the producers themselves. Projects that are typically funded with the Fair Trade premium include investments made to increase farmer produc- tivity; investments in community infrastructure such as the building of schools, health clinics, and crop storage facilities; offering training for members of the community; the provision of educational scholarships; improvements in water treatment systems; conversion to organic production techniques; and so on.
F
Figure 1 Comparision of Fairtrade Market Prices for Coffee, 1989–
Source: © Fairtrade Foundation, adapted and used with permission. Notes: NB Fairtrade Price = Fairtrade Minimum Price* of 140 cents/lb + 20 cents/lb Fairtrade Premium.** When the New York prices is 140 cents or above, the Fairtrade Price = New York price + 20 cents. The New York Price is the daily settlement price of the 2nd position Coffee C Futures contract at ICE Futures US.
- Fairtrade Minimum Price was increased on June 1, 2008, and April 1, 2011. ** Fairtrade Premium was increased on June 1, 2007, and April 1, 2011.
0
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1989 Collapse ofInternational Coffee Agreement
30-year low (2001) 1989 1992 1996 1999 2002 2006 2014
30-year high (2011)
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Fairtrade New York Market
j_dragusanu_263.indd 4 5/9/14 2:12 PM
Figure 1 : The Fair Trade minimum coffee price, 1989 – 2014
provision of educational scholarships, investments in community infrastructure, improvements in water treatment systems, improved production practices, including conversion to organic production and the implementation of environmentally responsible production. For example, Ronchi ( 2002 , pp. 19 – 20 ) documents an example of the Costa Rican cooperative Coope Llano Bonito using the premiums to hire a full time agricultural technician to help with such objectives. As of 2011 , FLO explicitly mandates that five cents of the premium must be invested towards improving the quality and/or productivity of coffee. For coffee to be sold under the FT mark, all actors in the supply chain, including importers and exporters, must obtain FT certification. On the production side, the certification is open to small farmer organizations and cooperatives that have a democratic structure, as well as commercial farms and other companies that employ hired labor (Fair Trade Foundation, 2012 ). The certifi- cation entails meeting specific standards that are set and maintained by FLO. An independent certification company FLO-CERT (which became independent from FLO International in 2004 ) is in charge of inspecting and certifying producers (Fair Trade Foundation, 2012 ). For coffee, the FT compliance criteria focus on the social, economic, and environmental
small plots in family farms: 92 percent of coffee farmers have plots that are less than 5 hectares and 6 percent plots that are between 5 and 20 hectares (Instituto del Café de Costa Rica, 2017 a). During the harvest season, which generally lasts from December to April, coffee farmers deliver the cherries to a collection center belonging to a local mill (called beneficio) for processing.^3 The pulp of the cherries is removed and the beans are washed. The resulting product is called parchment coffee. The mills then sell the parchment coffee to exporters and domestic roasters. Exporters are specialized domestic firms who aggregate purchases from multiple mills and sell them to foreign buyers. In many cases, mills and coops have their own export arm. In addition to coffee processing services, cooperatives also provide a range of services to their members such as the provision of agricultural supplies, technical assistance, marketing assistance, and credit. Coffee processing and sales in Costa Rica are regulated through Law no. 2762 , which was adopted in 1961 , and is more commonly referred to simply as the ‘Coffee Law’. The purpose of the law was “to establish an equitable regime to regulate the relations between coffee producers, mills, and exporters that guarantees a rational and truthful participation of each sector in the coffee business” (Instituto del Café de Costa Rica, 2017 c). The Costa Rican government established a non-governmental agency called Instituto del Café de Costa Rica (ICAFE) to implement and enforce the provisions of the Coffee Law. The process of the sale of coffee is as follows. Farmers deliver their harvested coffee cherries to the the mill. At this point, they receive an advance payment which is determined using the world coffee prices that are prevailing at the time. Historically, the advance payment has been approximately two thirds of the total payment that the producer eventually receives. Every 15 days, mills must report the amount of coffee received to ICAFE. Mills then sell the parchment coffee to exporters and domestic buyers. All coffee sale are registered and must approved by ICAFE. The contract price must be equal to or above the world coffee price, plus a differential which is set in advance by ICAFE based on four different coffee attributes (five categories, eight type, seven qualities, and six preparations). From January to October, mills make trimestrial payments to producers. These payments are defined by ICAFE according to each mill’s sales. At the end of the harvest year, after all coffee has been sold, mills pay producers a final (^3) Cooperative members generally take the cherries to be processed at their cooperative mill, although they are free to sell their cherries to others mills.
liquidation payment. The ICAFE Liquidation Board calculates a liquidation price for each mill which is equal to total mill sales minus each mill’s expenses and profits divided by the amount of green coffee received. The total payment to a producer is equal to the mill liquidation price times the amount of coffee received from that producer. Each mill needs to submit detailed expenses to ICAFE for approval. Historically, mill profits have been approximately 9 % of total mill sales. The final liquidation prices for each mill must be published in Costa Rica’s main newspapers in November, and the mill must pay producers the balance of their payment within eight days. Historically, producers have received approximately 80 % of the final coffee price. There are a number of ways that FT could affect the incomes of farmers in this setting. First, coffee that is sold as FT will have a higher sales price, particularly during periods in which the price floor is binding. In addition, farmers who belong to an FT-certified cooperative that also owns its own mill will also obtain a share of the mill’s profits. Furthermore, if the cooperative also registers as an exporter, then the export mark-up (which is about 2. 5 % of the coffee price) will also go to the cooperatives (and is members). Thus, we expect FT to potentially have two primary effects. It provides a higher final sales price and it helps farmers to capture a larger share of the final price.
C. Anecdotal Evidence on Selection into Fair Trade Certification
The central issue for the empirical analysis is the nature of selection into certification. Specifically, a natural question to ask is: if FT has benefits, why aren’t all mills FT certified? To better understand the source of variation underlying FT certification, we undertook interviews with four FT-certified cooperatives in August of 2012. The interviews revealed a number of factors that underlie variation in certification status for Costa Rican coffee producers.^4 While FT has benefits it as has costs and mills vary in the effective costs that FT imposes on them. Several cooperatives mentioned an important cost of FT being the potential loss that they would suffer due to FT requirements that prevent them from selling certain products – primarily pesticides – in their stores. Many mills operate a store where they sell various agricultural supplies to the community. The extent to which a mill earns revenue from the sale of agricultural chemicals banned by FT affects its costs of certification. If this characteristic is historically (^4) For an earlier case study of FT-certified coffee cooperatives in Costa Rica, see Sick ( 2008 ) and Ronchi ( 2002 ).
account for producer fixed effects.
3. Producer-level analysis
To construct the data necessary to examine the effects of FT certification on coffee producers we combine two types of data. The first is information on coffee prices and quantities sold by mills and cooperatives. These are provided by ICAFE by aggregating the individual transaction-level data from the sale contracts between mills and buyers (exporters and domestic roasters). The data contains information on total production (total coffee received for wet-milling from coffee growers in that year’s harvest), disaggregated by the quantity sold to exporters and the quantity sold to domestic buyers. The data also include average prices obtained for the coffee sold to exporters and domestic buyers.^5 Since ICAFE does not collect information on the sales of coffee disaggregated by FT/conventional status, we are only able to identify which cooperatives are FT certified. This information is obtained from multiple sources. The main source comes from FLO certification rosters which are available to us from 2003 until 2011 and which contain the name and date of certification for all producer-organizations. From these we extract the names of certified coffee producers in Costa Rica and create an FT-certification indicator variable that equals one in the years in which a mill is FT certified and zero otherwise. Since official certification rosters from FLO are not available to us prior to 2003 or after 2011 , we have supplemented this with records from the mills listed by FLO-CERT as being FT certified to determine their initial date of certification. We link the information on a mill’s certification status with the ICAFE data using the name of the producer organization, which is reported in both sources of data. The matched data results in an unbalanced panel of 332 coffee mills that are observed annually from 1999 until
A. Checking for evidence of selection into certification
Before turning to an examination of the effects of FT certification on producers, we first consider the issue of selection into certification. To assess the importance and nature of selection, we check whether, when conditioning on time-invariant producer characteristics, time-varying producer (^5) The ICAFE data are recorded by harvest years (rather than calendar years), which range from October to October. In our data, an observation in year t corresponds to the harvest which is from October in year t − 1 to October in year t.
characteristics predict the onset of Fair Trade certification. That is, we check whether there is a significant increase in production, exports, or sales prices just prior to the onset of certification. If so, then this is evidence that an omitted time-varying factor, like a new contract to supply an overseas buyer, is causing the producer to become certified. We examine this by estimating the following equation where the dependent variable is an indicator variable for the onset of FT certification: I iOnset,t = αi + αt + β 1 Xi,t + εi,t, ( 1 )
where i indexes a coffee mill and t years ( 1999 – 2014 ). I iOnset,t is an indicator variable that equals one if period t is the first year that producer i is FT certified. αi denotes mill fixed effects and αt denotes year fixed effects. Mill fixed effects control for time-invariant characteristics, like those discussed in section 2 C, that may affect the timing of FT certification. The variable Xi,t denotes an observable characteristic that may predict the onset of certification, either domestic sales, exports, total sales, exports as a share of total sales, domestic prices, and export prices. We measure each in two ways. The first is with a one year lag (e.g., in period t − 1), which tests whether the value of the variable in the previous year predicts the onset of FT certification. The second measure is the growth rate of each variable during the previous two years (e.g., between periods t − 2 and t). This checks whether the onset of certification is preceded by exceptionally high rates of growth in sales, exports, or prices. The estimates are reported in Table 1. Panel A reports the coefficients for the variables measured as a one-year lag of their levels and panel B reports the coefficients for the variables measured by their two-year growth rates. For both sets of variables, we are interested in whether we observe a positive relationship between the independent variables and the onset of certification. We find no evidence of such an effect. All twelve reported coefficients are not statistically different from zero, and all twelve have very small point estimates. In addition, the coefficients are as frequently negative as they are positive. Thus, we find no evidence for positive selection of producers into FT certification.
B. Effects of FT certification on producers
We now turn to an examination of the estimated effects of FT certification on coffee producers. Our analysis examines a range outcomes. Since the primary mandate of FT is to ensure higher and more stable prices to certified farmers (through the premium and price floor), our primary
mill fixed effects and year fixed effects, respectively. Mill fixed effects control for time-invariant characteristics, like those discussed in section 2 C, that may be correlated with the timing of FT certification. The coefficient β captures the average effect of FT certification on the outcomes of interest. Given the nature of FT certification, we do not expect certification to have the same effect in all years. Through its guarantee minimum price, FT should have a greater effect in periods when the coffee price is lower than the price floor and the FT minimum price is binding. To capture this, we also estimate a second specification:
yi,t = μi + μt + γ 1 IFT i,t + γ 2 I iFT,t · Itp<p + i,t, ( 3 )
where Ip<pt is an indicator variable that equals one if the world coffee price is below the minimum FT price at any point during the year. During our sample period, 1999 – 2014 , the world price of coffee was below the FT minimum price for nine years, and thus Itp<p equals one during these periods. We also estimate a third specification, where we replace the indicator variable Itp<p with a continuous measure of the size of the price gap, P (^) tGap. The variable is equal to the FT minimum price minus the world price in years in which the price floor is binding. In years when it is not binding, the variable takes on the value of zero i.e., P (^) tGap = min{0, p − p}. Thus, the variable measures the increase in price that the FT minimum price provides if coffee is sold as FT. The revised estimating equation is:
yi,t = ζi + ζt + φ 1 I iFT,t + φ 2 IFT i,t · P (^) tGap + νi,t. ( 4 )
In equations ( 3 ) and ( 4 ), the coefficients γ 2 and φ 2 capture the insurance benefits of FT certification that are obtained when the world price of coffee falls below the FT floor. The coefficients γ 1 and φ 1 capture the average effect that FT provides, even when the world price is above the price floor. These should capture the benefits of the FT price premium, which producers receive whether or not the price floor is binding. Our primary outcome of interest is the average price that producers receive for their coffee. Given that the stated intention of FT certification is to provide insurance and higher prices to certified producers, we expect a positive effect of FT certification on prices. We measure prices in two ways. The first is to use actual prices but winsorized at the 99 th percentile. Due to mea-
Table 2: The Effect of FT Certification on Sales Prices (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Fair Trade Certified, FTC (^) (0.0241)-0.0244 (^) (0.0266)-0.0393 (^) (0.0251)-0.0310 (^) (0.0379)0.0008 (^) (0.0400)-0.0161 (^) (0.0393)-0.0104 (^) (0.0288)-0.0197 (^) (0.0313)-0.0401 (^) (0.0294)-0.0274 (^) (0.0246)0.0204 (^) (0.0252)0.0095 (^) (0.0251)0. FTC x Price Gap Indicator (^) (0.0346)0.0535 (^) (0.0383)0.0609 0.0738(0.0220) 0.0397(0.0195) FTC x Price Gap (USD/lb) (^) (0.0795)0.1030 (^) (0.1270)0.1750 (^) (0.0618)0.1210 (^) (0.1010)0. 16 Year FE Mill FE YY YY YY YY YY YY YY YY YY YY YY YY Observations Number of clusters/mills 2,038 307 2,038 307 2,038 307 2,038 307 2,038 307 2,038 307 2,000 307 2,000 307 2,000 307 2,000 307 2,000 307 2,000 307 Mean of dep. variable Std. dev. of dep. variable 1.140.63 1.140.63 1.140.63 -0.030.61 -0.030.61 -0.030.61 1.480.63 1.480.63 1.480.63 0.300.43 0.300.43 0.300.
Dependent variable:
Notes domestic : The price table calculated reports OLSas the estimates average (^) priceof equations obtained (1)-(3). by a mill An in observation a given year is for a mill-year.the domestic Each coffee specification sales transactions contains milland expressedand year fixed in USD/lb. effects. The The domestic dependent price variable was winsorized in columns at 1-3the (^) 99this the percentile. average price The obtained dependent by a variable mill in a in given columns year (^) in4-6 export is the coffeenatural sales logarithm transactions of the andnon-winsorized expressed in domestic USD/lb. The price. export The pricedependent was winsorised variable in at columns at the 99th 7-9percentile. is the export The pricedependent calculated variable as thein columns price. The 10-12 FairTrade is the minimumnatural logarithm price was of equalthe non-winsorized to $1.25/lb from export 1999 price. to 2010 The andPrice $1.35/lb Gap Indicator starting equals in 2011. 1 in yearsThe Price in which Gap variablethe world equals price zerofor Arabica when thecoffee Price is belowGap Indicator the FairTrade is zero minimum and the difference Coefficients are reported with standard errors clustered at the mill-level in parantheses. ***, **, and * indicate significance ath the 1, 5, and 10 percent levels. between the FairTrade minimum price and the world price for Arabica coffee in years when the Price Gap Indicator is equal to 1. The Price Gap variable ranges from 0 to 0.66 USD/lb.
Domestic Price (USD/lb) ln Domestic Price Export Price (USD/lb) ln Export Price
surement error, a small number of observations have high prices and are thus highly influential. The second is to use the natural log of prices. This facilitates a convenient interpretation of the coefficients and reduces the effect of extreme observations. Estimates of equations ( 2 )–( 4 ) are reported in Table 2 , where we separately examine the price of coffee sold domestically and internationally. In columns 1 – 6 , the dependent variable is the average price of domestic coffee sales and in columns 7 – 12 it is the average price of coffee exports. Columns 1 – 3 and 7 – 9 report estimates using winsorized prices, while columns 4 – 6 and 10 – 12 report estimates using the natural log of prices. Estimates of equation ( 2 ), which does not allow for a differential effect of FT when the price floor is binding, are reported in columns 1 , 4 , 7 , and 10. In each of the specifications, the estimated coefficient β 1 is small in magnitude and is not statistically different from zero. As is reported in the subsequent columns, this zero effect masks important heterogeneity. Estimates of equation ( 3 ) are reported in columns 2 , 5 , 8 , and 11. Examining the price of domestic sales (columns 2 and 5 ), we find no significant additional benefit to FT certification when the price floor is binding. Although the estimates of γ 1 are positive, they are not statistically different from zero. When we estimate the effect on export prices (columns 8 and 11 ), we find a positive (and significant) effect of FT certification on prices in years when the price floor was binding. These findings are consistent with the fact that coffee that is sold domestically by FT-certified producers are less likely to be sold as FT certified (and receive the
Table 3: The Effect of FT Certification on Quantities Received and Sold by Mills (1) (2) (3) (4) (5) (6) (7) (8) (9)
Fair Trade Certified, FTC (^) (0.124)0.039 (^) (0.140)-0.052 (^) (0.130)-0.007 (^) (0.140)-0.059 (^) (0.158)-0.163 (^) (0.144)-0.099 (^) (0.0073)-0.0012 (^) (0.0083)0.0025 (^) (0.0084)-0. FTC x Price Gap Indicator 0.398** (0.161) (^) (0.199)0.380* -0.016*(0.007) FTC x Price Gap (USD/lb) (^) (0.460)0.888 (^) (0.449)0.636 (^) (0.097)0. 16 Year FE Mill FE YY YY YY YY YY YY YY YY YY Observations Number of clusters/mills 1,740 307 1,740 307 1,740 307 2,108 307 2,108 307 2,108 307 1,740 307 1,740 307 1,740 307 Notes: dependent The (^) variabletable reports in columns OLS estimates 1-3 is the of naturalequations logarithm (1)-(3). of An the observation total quantity is a mill-year.received by Each the specificationmill from coffee contains farmers. mill The and dependent year fixed effects.variable The in columns the share 4-6 of the is the quantity natural received logarithm by aof mill the that total is quantity sold. Note (expressed that this variable in lbs) sold is only by a reported mill on the in export the sample market. years The 2003 dependent to 2014. variable The Price in columns Gap Indicator 7-9 is equals $1.25/lb one from in years 1999 into which 2010 theand world$1.35/lb price starting for Arabica in 2011. coffee The is Price below Gap the variable FairTrade equals minimum zero when price. the PriceThe FairTrade Gap Indicator minimum is zero price and thewas difference equal to between variable rangesthe FairTrade from 0 minimumto 0.66 USD/lb. price Coefficientsand the world are price reported for Arabica with standard coffee inerrors years clustered when the at Price the mill-level Gap Indicator in parantheses. is equal to ***, one. *, The and Price indicate Gap significance ath the 1, 5, and 10 percent levels.
Dependent variable: ln Total Quantity Received ln Total Quantity Sold^ Share of Quantity Received that is Sold
rather than a conventional mill. (While FT certified member farmers generally sell to their coop, they often also sell their coffee to other third parties.)^7 When world prices are low and the FT minimum price becomes binding, then FT-certified mills have the potential to pay higher prices relative to non-FT mills (if the coffee is sold as FT). According to the estimates from column 2 , FT-certified mills receive 0.40 − 0.05 = 35% more coffee relative to non-certified mills in years when the price floor is binding. When it is not binding, similar quantities are received. Columns 4 – 6 show that the total quantities sold by the mill (both domestically and interna- tionally) follow the same pattern as the total quantities received by the mill. Thus, we see that when the price floor is binding FT-certified mills both receive more coffee (columns 1 – 3 ) and sell more coffee (columns 4 – 6 ). Comparing the two sets of coefficients, we see that the interaction coefficients for the quantity sold regressions are lower than the interaction coefficients for the quantity received regressions: 0. 40 versus 0. 38 (column 2 versus column 5 ); and 0. 89 versus 0. 64 (column 3 versus column 6 ). This raises the question of whether FT-certified mills are less able to sell all coffee received when the price floor is binding. Thus, in columns 7 – 9 , we reported estimate of equations ( 2 )–( 4 ) with the share of the quantity received that is sold as the dependent (^7) Although the policy of FT cooperatives is that members should not sell their products to other mills or third-party intermediaries, in reality farmers typically do (Ronchi, 2002 , p. 16 ).
Table 4: The Effect of FT Certification on Quantity Sold Domestically and Internationally (1) (2) (3) (4) (5) (6) (7) (8) (9)
Fair Trade Certified, FTC (^) (0.210)-0.125 (^) (0.235)-0.327 (^) (0.219)-0.222 -0.0108(0.164) -0.0905(0.182) -0.0342(0.169) (0.0320)0.0356 (^) (0.0355)0.0517 (^) (0.0334)0. FTC x Price Gap Indicator 0.730*** (0.205) (0.198)0.289 (^) (0.044)-0. FTC x Price Gap (USD/lb) 1.518*** (0.445) (0.441)0.370 (^) (0.078)-0. 16 Year FE Mill FE YY YY YY YY YY YY YY YY YY Observations Number of clusters/mills 2,038 307 2,038 307 2,038 307 2,000 307 2,000 307 2,000 307 2,108 307 2,108 307 2,108 307 Notes: dependent The (^) variabletable reports in columns OLS estimates 1-3 is the of natural equations logarithm (1)-(3).of theAn (^) totalobservation quantity is (expressed a mill-year. in Each lbs) soldspecification by a mill (^) oncontains the domestic mill and market. year fixed The (^) dependenteffects. The variable columns in7-9 columns is the share 4-6 isof thetotal natural sales quantity logarithm that of are the sold total as quantity exports. (expressed The Price Gap in lbs) Indicator sold by equals a mill oneon the in yearsexport in market. which the The world dependent price for variable Arabica in coffee Price Gap is below variable the FairTrade equals zero minimum when the price. Price The Gap FairTrade Indicator minimum is zero and price the was difference equal to between $1.25/lb the from FairTrade 1999 to (^2010) minimum and $1.35/lb price and starting the world in 2011. price The for Arabica standard errors clustered at the mill-level in parantheses. ***, **, and * indicate significance ath the 1, 5, and 10 percent levels. coffee in years when the Price Gap Indicator is equal to one. The Price Gap variable ranges from 0 to 0.66 USD/lb. Coefficients are reported with
Dependent variable: ln Domestic Quantity Sold ln Export Quantity Sold^ Export Quantity as a Share of Total Quantity Sold
variable. We find mixed evidence of more coffee being unsold by certified mills when the price floor is binding. In column 8 , the coefficient on the interaction term is negative and significant, but in column 9 it is positive and insignificant. The negative coefficient although significant, is small in magnitude and very close to zero. The coefficient suggests that 1. 6 % less of the coffee received can be sold by FT-certified mills when the price floor is binding. We next turn to a closer examination of the quantity of coffee sold and estimate effects sepa- rately for domestic and international sales. The estimates are reported in Table 4. Columns 1 – 3 report estimates of equations ( 2 )–( 4 ) with the quantity of domestic coffee sales as the dependent variable, while columns 4 – 6 report estimates with the quantity of coffee exports as the dependent variable. We see that the effects on total sales appear to be mainly due to domestic sales. The coefficients on the interaction terms for domestic sales are larger in magnitude and more precisely estimated than for foreign sales. This suggests that at times when the price floor is binding, although some of the additional coffee received by FT-certified mills is exported, most appears to be sold domestically. In columns 7 – 9 , we test for a differential effect on domestic sales versus exports for certified mills when the price floor binds. As reported, while in general FT-certified mills export more, when the price floor binds, the export share of FT-certified mills tends to
