Direct Trade vs. Fair Trade

You’ve probably seen the term Fair Trade a lot on product packaging.  When you see that label you probably assume that people all along the supply chain, from farmers on up, are receiving a higher price for their product than they would otherwise.  But, that’s not always the case.  For example, with cacao it’s possible that farmers who pay money for a Fair Trade certification could get paid LESS than the already-too-low commodity price for cacao.  Does this mean Fair Trade is a bad thing.  No.  But it does mean that all of us need to spend more time understanding the food supply chain so that we can make informed decisions.

Likewise, if you see an “Organic” certification on your food you probably assume it hasn’t been sprayed with RoundUp, which contains the toxic chemical glyphosate.  But that’s not always the case either.  Certifications sometimes don’t tell the whole story.

How our food comes to us is incredibly important.  Many of us have come to rely on certifications to give us a sense of how safe a food is, and how well the people all along the supply chain are being treated and compensated.  We rely on certifications because it’s easy – we’re all busy and don’t have time to fully research every single food we buy.  But, the reality is that if you truly want to understand how safe your food is and what’s happening all along the supply chain you need to do more than just look at labels on packages.

In this post we’re going to talk about two different terms that are used frequently on chocolate packaging:  Fair Trade and direct trade.  These two terms are the tip of the iceberg when it comes to understanding food sourcing, but we thought it was a good place to start because they’re both familiar and prevalent.

Keep in mind that these terms refer to methods of purchasing that companies use for the raw materials that go into their products.  Strictly speaking they have nothing to do with quality, although depending on how a company defines direct trade that term can, potentially, address that issue.  But, that’s just one of the reasons the two terms can sometimes be confusing.

We tried to keep this post brief but it’s a complex topic, even though it’s still a very small part of the overall supply chain picture.   We appreciate that you’re taking the time to learn more about these two terms, and we hope you find this information helpful.  We’ll be explaining more about supply chain terms and issues in future posts, since having a truly equitable supply chain is one of the many reasons we started Goodnow Farms Chocolate.  Thanks for taking the time to learn more about how your food is sourced!

Direct vs. Fair

You’ll often see two terms describing how chocolate makers buy their beans: “Fair Trade” and “direct trade.” There’s a lot of confusion about what these terms mean, and for good reason – it’s complicated.  But, it’s very important to understand how the food you buy is sourced, and the way that farmers and others along the supply chain are compensated for their goods.  While it’s easy to rely on certifications like Fair Trade, they don’t always mean what many people think.  Taking the time to dig deeper into the supply chain is the only way to really know is the food you’re buying is being ethically sourced, and unfortunately many companies aren’t forthcoming with their supply chain information.

So, let’s do a deep dive into what Fair Trade and direct trade really mean.  The two buying methods sound similar, but in practice they’re very different.  We’ll start with Fair Trade.

How Fair Trade Works

Fair Trade means the producer (such as a farmer or cooperative) pays an up-front fee, and continues to pay annual fees, to a for-profit entity to obtain a Fair Trade certification. This certification is meant to act as an assurance to buyers that the labor practices of the producer are ethical (such as free from child labor) and that other labor standards are met (such as paying a fair wage).

When a chocolate maker (or any company) purchases a Fair Trade certified product, they pay what’s referred to as the “Fair Trade Minimum,” which is a set price which is, at least theoretically, a certain percentage above the commodity price for that product.  The Fair Trade Minimum for cacao doesn’t fluctuate with the commodity price, so it’s possible that the Fair Trade Minimum could actually be less than the commodity price.  As Fair Trade describes it on their website, the Fair Trade minimum price “acts as a safeguard when market prices drop.”  In June of 2019 the Fair Trade Minimum for conventional cacao was raised to $2400/metric ton, and the current commodity price is $2394/metric ton – a difference of only $6 per ton.  (We should note that the pricing structure for organic cacao is a bit different – the Fair Trade price is always $300 above the commodity price or the Fair Trade Minimum – whichever is higher.)

But, in addition to the Fair Trade Minimum, buyers also pay what’s called a “Fair Trade Premium.”  This is a set price paid per metric ton, which is currently $240.  This money is put into a Fair Trade Community Development Fund, which according to the Fair Trade website is then paid to farmers to “collectively invest in the projects they need most.”

In theory, the producer will recoup the cost of the certification by charging a higher price for their beans, and the chocolate maker has an assurance that the labor practices of the producer are equitable.

The reality, not surprisingly, is a bit more complicated. For one thing, many small farmers and cooperatives can’t afford the fees required to obtain Fair Trade certification. For another, questions have been raised about whether Fair Trade certification guarantees good labor practices. Journalists and researchers have documented instances where Fair Trade certified producers are engaged in unsavory labor practices, such as not paying a fair wage or using child labor. Although these instances occurred in West Africa it shows that monitoring and enforcement of these certifications may not be adequate.

There’s also the issue that the Fair Trade minimum could potentially be less than the commodity price of cacao.  Since the Fair Trade minimum usually stays set for at least a year, if the cacao commodity price rises quickly the farmer could potentially receive a higher price by simply selling their cacao on the commodity market.  Another issue, in our view, is that the Fair Trade minimum and premium together isn’t enough of a price increase to make a significant impact on the problem of endemic poverty among farmers.  As we’ll explain shortly, we pay much more for our cacao than the Fair Trade minimum and premium combined.

One other very important aspect of Fair Trade which has nothing to do with price but which is particularly relevant to single origin chocolate makers is that the certification isn’t a guarantee of quality – if a farmer has poor quality beans but can afford Fair Trade certification, he’s incentivized to get it because he may be able to obtain a higher price for those beans.  Once he’s paid for his certification he’s allowed to sell his cacao for a Fair Trade price since Fair Trade doesn’t certify quality.

So, how about direct trade?

How direct trade works

Unlike Fair Trade, direct trade isn’t a certification.   It’s simply a description of the relationship between the buyer and the producer. While the term is broad, a common understanding of a direct trade relationship is when the buyer works directly with the producer to determine a fair price to pay, and buys directly from the producer.  This approach cuts out the middleman, such as a broker who would take a percentage of the profit, with the intent being that the producer receives a higher price. Often implied, but not always the case, is that the buyer has a reasonable assurance from the producer that their labor practices are fair, and their farming practices sustainable. Direct trade can also mean that the buyer has a relationship with the producer that goes beyond simply purchasing their product.

The challenge with direct trade is that there is no oversight.  Any company can put the term “direct trade” on their products.  Like Fair Trade, direct trade isn’t a guarantee of quality.  And, more problematic, the term doesn’t require buyers to pay any particular price for the product they’re buying.  The buyer could actually pay less than the Fair Trade price – or even less than the commodity price.

So, why is direct trade a good thing?  Because when practiced in good faith it means the buyer has a close relationship with the farmer or producer, and has firsthand knowledge of the labor practices and quality controls of the product.  It also means that the buyer has negotiated a price directly with the producer or farmer.  And, when also done in good faith, this price is one that adequately compensates that farmer or producer for the time and effort they’ve put in to make a high quality product.

What does direct trade mean to us? It means we visit the farms and meet the farmers who supply each of our origins. We spend time discussing their approach to farming, and make sure we’re satisfied it’s sustainable. We also discuss their labor practices, and meet with the people who are growing, harvesting, fermenting and drying the cacao. We negotiate the price directly with the farmers and cooperatives or with the organization working with them to bring their cacao to market.  In most cases our negotiated price is significantly and meaningfully higher than what we’d pay for Fair Trade certified beans.  As we mentioned above the current Fair Trade Minimum for a ton of cacao is $2400 (only $6 more than the commodity price).  Add the Fair Trade premium of $240 and we’d be paying $2640 per ton of Fair Trade cacao.  However, to give just a few examples, we’ve negotiated prices of $9200/ton for our Esmeraldas cacao, $7400/ton for our Ucayali cacao, and $8100/ton for our Asochivite cacao.  These prices reflect the time and effort the farmers and producers put into making a product of incredibly high quality, and allows them to make a decent profit.

In addition, to us direct trade means we have a stake in the long-term success of each of the growers we work with. We’re in touch with them on a regular basis, and do our best to help with challenges they may encounter. For example, the San Juan Chivite farmers needed a full-time manager to oversee their post harvest processing (fermentation and drying), so we contributed toward a salary for that person. We believe that long-term, sustainable relationships that benefit both parties are the essence of direct trade.

So, as you can see, direct trade isn’t really a guarantee of anything.  How a company treats a farmer, and how they compensate that farmer, completely depends on the ethics of that company.  For that reason “direct trade” isn’t an ideal term – it’s just the best term we have at the moment to communicate that we deal directly with a farmer.  As we’ve explained we have very close relationships with farmers and pay exceptionally high prices for their cacao, but just seeing that term on a product doesn’t mean another company is doing the same thing.

Direct Trade with a Broker

Although this complicates things even more, we should point out that in some instances direct trade can be a bit less direct. For example, with our El Carmen bean the producer uses a cacao broker to ship the beans to the United States. While we negotiate the price with the producer, we pay the broker.  So, why would the producer or buyer want this?

There are usually two reasons a producer works with a broker – economics and convenience. The least expensive way to get a significant amount of cacao to a port of entry in the US or Europe is usually by container ship. Each container can fit about fifteen tons of cacao beans, and the most cost-effective approach is to fill the container completely.

Now most small chocolate makers, ourselves included, don’t need anywhere near fifteen tons of cacao beans in a year, and many producers aren’t making even close to that much, either. This is where brokers can help.  They group together beans from various producers into containers, and the economies of scale they realize allow producers to minimize their export costs and chocolate makers to buy those beans for less than if they had to pay the full freight themselves.   This is potentially a good thing for everyone since it allows small farmers to export beans, and more money can go directly to them rather than toward export and shipping fees.

In our case, when we work with a farmer who prefers to use a broker we still visit the farm, or farms, personally, negotiate the price directly with the farmer, and maintain regular communication.  This is the purchasing method we use for our El Carmen and Boyaca beans, and we have very close relationships with the farmers for both.  We’ve visited numerous times, communicate regularly, negotiate the prices directly, and also worked with each farmer to develop a custom fermentation and drying protocol they use just for us.  The broker is really just a convenience for the farmers.

However, some buyers who say they practice direct trade will purchase beans from brokers without having any contact with the producer or farmer who made the beans.  They don’t have direct knowledge of the labor or quality control practices at origin.  They also don’t negotiate the price with the farmer, and have no idea how much the broker is actually paying the farmer for the beans.  In this scenario farmers could be getting paid far less than Fair Trade or commodity prices for their cacao.   In our view this isn’t truly “direct trade,” even though the cacao is being purchased from the same place.

The Takeaway

So, lots to think about.  Food sourcing is a convoluted and complicated business, but the only way we’re going to improve our approach to sourcing as a society is if we all pay more attention to how the companies we buy from actually treat the people growing our food.  There are a lot of issues with various supply chains, especially in the world of cacao, but we hope this post has helped shed some light on at least these two fairly ubiquitous terms.

With this knowledge you’re now a more educated consumer, and can make more informed buying decisions.  You can also build on this by continuing to seek out more information from companies about their trade practices.  Our advice is to start by visiting the website of a company from which you buy products frequently to see if they provide details of how they source their ingredients.  If they don’t, you can let them know you’d like to see this information posted since it affects your buying decisions.  The more often a company hears this the more likely they’ll provide the information.  Or, if you don’t like what you find out about their sourcing practices you can contact them to let them know you won’t be purchasing their products again until they make improvements.  Again, the more a company hears comments like this the more likely it is they’ll make a change.

Thanks again for taking the time to read this very long post.  We hope you learned something, and that it empowers you to take positive steps toward truly understanding where your food comes from and how suppliers are compensated.

Please feel free to reach out with any thoughts or comments – we’d love to hear from you.  And, if there’s anything in particular you’d like us to address in our next supply chain post please let us know!