The Taste of Many Mountains

by Bruce Wydick

  “You should stop playing with your joystick and get your work done,” Angela retorted.

  “Video games give me relief from being around stressed-out people as yourself.”

  “You always say Dutch people are never late,” panted Angela.

  “Except when there is soccer, and last night I played an outstanding Super Nintendo World Cup match against my—”

  “I can’t believe we’re late because you played some video soccer game last night with your roommate instead of getting your presentation ready,” she bellowed, out of breath.

  They stared at the map and made out the title of the building, Giannini Hall, named after the Italian-American founder of the Bank of America.

  “Angela, look—this is the way!” Alex pointed uphill to the north, and they sprinted in the direction of the building.

  “I think I’m going to pass out,” said Angela.

  “You must harness your Mayan mountain-trekking stamina,” shouted Alex as they ran.

  They stopped, even more winded and sweaty, outside the building. Taking a moment to catch their breath, they opened the door and were greeted by a stern gaze from the marble bust of A. P. Giannini. The front doors let into a striking marble foyer with a twenty-foot ceiling. A portrait of an important-looking man in a blue suit hung on the wall. A wide, winding staircase to the right led up to faculty offices and classrooms on the second and third floors. Their footsteps echoed in the marbled vestibule as they proceeded up the staircase.

  On the next floor, they were immediately greeted by Sofia, who quickly motioned for them to join the meeting in the conference room. The others were already seated. She gave Angela a quick hug and felt the sweat on her back. “Running a bit late?” She smiled. Angela rolled her eyeballs and silently jerked her head in the direction of Alex.

  They entered the conference room, which was filled with Berkeley professors, graduate students, a few undergrad research assistants, and executive directors of fair trade coffee associations. Among the faculty were two of their own professors from the University of San Francisco, Rich and Sofia’s advisors at Berkeley, Rudolph Goldhard, a professor in the political science department, and another professor collaborating on the project who had flown up from the University of California at San Diego for the meeting. Sofia’s advisor introduced them to Norman Blowner and Josefina Reyes, executives from fair trade associations in the United States and Europe, and ushered them to two seats on one side of the conference table.

  Shelves of academic journals surrounded them, interspersed with black-and-white photographs of some of the department’s founding faculty members and economics Nobel Prize winners at the university, commemorative plaques, and other awards won by faculty and students. Some of the participants in the project were loading slides onto a laptop from their flash drives to project their results onto a screen at the end of the table. After they had finished, conversation died down and the room quieted.

  “We are grateful to you for your assistance on this project,” said Rich and Sofia’s advisor, who was apparently directing the meeting. She directed her comments to Angela and Alex. “And it’s wonderful that you can use some of this for your thesis work.”

  “We will begin with Alex and Angela. Please, would you tell us what you have found?”

  Alex walked up to the projector and loaded his slides, encountering a temporary compatibility problem with the operating system, which was quickly fixed with the assistance of one of the other graduate students. Angela fidgeted in her seat during the awkward start as Alex glanced around at the serious, inquisitive faces around the table.

  He began by reviewing the experimental design with them, and then he launched into the results. “My experiment tries to determine how much more consumers are willing to pay for fair trade coffee. I carried it out at a café in San Francisco on three Saturdays.” His feet shuffled a little bit, and all of a sudden he looked a little unsure of what to do with his hands. He glanced at his faculty advisor from San Francisco, who offered an encouraging smile. “Well, I began on the first Saturday of the experiment by handing to our subjects, the café customers, coupons for French Roast coffee at the door. The coupons offered a choice on the first day of fifty cents off for standard French Roast and twenty-five cents off for fair trade French Roast.”

  “And so what happened?” asked Sofia from her seat around the table, eager to know.

  “Well, when we counted coupons in the container at the end of the session, thirty-seven of the customers had redeemed the coupon for fair trade and twenty-five for the standard coffee. So the next Saturday I changed the values of the coupons so that it made the standard French Roast much more attractive to them. It gave the customers a dollar off for the standard and twenty-five cents off fair trade.”

  “Quite a substantial differential,” one of the professors noted, fingertips pressed together under his chin.

  “Yes, I know it,” nodded Alex. “At that seventy-five-cent differential, forty-one chose the standard, but still sixteen opted for the fair trade.” The professors nodded in affirmation. Made sense—prices matter.

  “The third Saturday I split the difference, offering coupons with seventy-five cents off the standard and twenty-five cents off fair trade. At the end of the day, basically it was a tie: thirty-three of the customers chose the fair trade French Roast and thirty-two chose the standard French Roast.”

  “That was lucky,” interjected Sofia. “You didn’t even have to interpolate.”

  “Yes,” grinned Alex. “To make it a short story, it appears that the median café patron, at least in San Francisco, is willing to pay fifty cents more for a cup of fair trade coffee over free trade.”

  The room buzzed with conversation, many surprised at the hefty premium customers were willing to pay to buy fair trade. Norman Blowner and Josefina Reyes, the fair trade executives, glanced at each other and at Rudolph Goldhard approvingly. The professor thanked Alex. He sat down, hastily running his shirtsleeve across his forehead.

  “Angela, what are the results from your survey?” the Berkeley professor asked.

  Angela brought out a folder and gave everyone around the conference table a handout with the printed results from her slides. It had results from her survey of cafés around the San Francisco Bay Area. She met the eyes of the group, cleared her throat, and began.

  “I surveyed 225 cafés around virtually every part of the Bay Area by telephone, getting phone numbers from the yellow pages, where I felt I could get the most complete sample. The average price of a fair trade cup of coffee is $1.70, and for the latte it is $3.20. I examined the average price difference between what the cafés charge for fair trade and the standard free trade coffee using two easily comparable products: eight-ounce cups of coffee and twelve-ounce lattes. As you can see, the average markup for fair trade coffee overall came out to approximately 15.2 cents.”

  “Do you get the same result when you control for other variables? For example, fair trade may have a higher markup because it’s frequently organic,” one of the professors pointed out.

  “Yes. Even when we run a regression analysis controlling for other variables, we find that fair trade adds almost exactly the same markup on the price,” Angela responded. The faculty sat back in their chairs, now more willing to accept the results of her study.

  “Well, of course fair trade coffee is costing the cafés slightly more than the standard coffee,” Norman Blowner quickly pointed out.

  “Yes, we found that roasters often charge between fifty cents and a dollar more per pound for fair trade to cafés for wholesale coffee,” said Angela. “That seems a lot considering they pay only around twenty cents more for the beans. I think I understand why the markup in general is so high at the roaster level; the roasters have some significant costs in the form of high domestic wages, insurance, and other things. But does it cost any more to roast fair trade coffee?”

  It was obvious to everyone at the table that of course it didn’t. Cafés
were clearly marking up prices of fair trade coffee because the consumer market was willing to pay more for it. Norman Blowner and Josefina Reyes were murmuring something to one another. “Thank you, Angela,” said Rich and Sofia’s advisor. Feeling relieved that her part was over, Angela returned to her seat next to Alex, where they quietly exchanged fist bumps.

  “Mr. Freeland, do you have something for us?”

  Rich had been relatively quiet, taking notes throughout the discussion, comparing these figures with what they had found over the summer. Rich stood up and opened his slides on the laptop. A colored graphic opened up on the screen that broke down the entire value chain from a cup of coffee.

  “So our data from the summer indicate grower costs at $1.02 for the 7.8 pounds of coffee cherries that become a pound of roasted beans. For this our fair trade–certified farmers received $1.29 per pound since only a quarter of their crop is actually sold as fair trade. The uncertified coffee growers got about $1.26. Just covering its costs, the nonprofit fair trade exporter sold to the importer-roaster at $1.48. The roaster sold the roasted fair trade beans wholesale to cafés and store retailers at $5.25, and the grocery store retailers sell this same pound of beans for about $9.00. The cafés brew up the pound of fair trade beans to make forty eight-ounce cups of coffee that they sell at an average of $1.70 a pop, so the beans in a single cup of coffee cost the café only 13.1 cents. Clearly a lot of this markup goes to cover electricity, rent, and the salary of our friendly neighborhood barista. But this pound of coffee bought from wholesalers for $5.25 creates about $68.00 of retail coffee.”

  There didn’t seem to be any questions, so he continued. “So if it might please the present company, I would like to draw several noteworthy conclusions from our data: First, because the certified growers received $1.29 per pound and the uncertified growers received $1.26 per pound, once you subtract the annual three-cent cost of certification, our fair trade coffee growers end up with what the little birdie left on the rock.”

  Blowner stood up, his bald head turning pink. “This is, frankly, an absurd set! We know that fair trade coffee offers myriad benefits to our coffee growers! We see them in the field every time we visit them. You can never tell us that what we do has no impact on them.”

  Josefina Reyes and Rudolph Goldhard nodded profusely in affirmation.

  “You see because you want to see,” Rich replied, unintimidated by the outburst. “But that is not what the data say. The fair trade growers are no better off than the regular free trade growers, at least as a result of growing fair trade coffee. Based on this year’s crop, they both have a profit margin of twenty-four cents per pound of roasted coffee. And the profit to both on a $1.70 cup of coffee is only about $0.006, or barely over half a cent.”

  That the profit to growers from a cup of coffee was so low was shocking to just about everyone, including the professors and the students who had been doing the fieldwork. The professors remained silent during the exchange, extend closed lips and raising their eyebrows in the well-known scholarly gesture indicating surprise but nonoverreaction.

  Rudolph Goldhard interjected, “Mr. Freeland, I was there during the coffee crisis. I saw what belonging to the fair trade network achieved for our growers. Saw with my own eyes, rolling up my sleeves with the coffee pickers. I find your presentation to be highly misleading and of dubious academic value.”

  “Fortunate you brought up the coffee crisis, Rudolph,” said Rich. “Nice segue into my next slide. You’re right that this is the time when fair trade brings maximum benefit to the growers. During the coffee crisis when prices fell to half of the fair trade price floor, once you subtract the cost of certification, the added profit to a grower who sells a quarter of his crop as fair trade is about one-third of a cent on a cup of coffee.” Some of the graduate students quickly checked this basic arithmetic. It was correct.

  “Now according to the presentation by my illustrious colleague from San Francisco”—he motioned toward Alex, who smiled sheepishly at the group—“the added willingness to pay for a cup of fair trade coffee by consumers in this liberal, consciousness-raised metropolis in which we live, appears to be about fifty cents. As economists, we count consumer surplus as an important benefit in a market. People feel better about consuming fair trade coffee because they think they are helping coffee growers, and they are clearly willing to pay through the nose for it, maybe to make themselves feel better, who knows. Understanding this, cafés mark up fair trade prices and take about 15.2 cents of this willingness to pay per cup, while the roasters seem to take about two to three cents of it.”

  Rich definitely had the attention of the group, and Blowner and Reyes looked on helplessly. Angela was sitting next to Goldhard, watching him doodle a series of daggers on his notepad as Rich charged on to his key point. “So to summarize, even in the worst of times, when coffee prices are in the tank and fair trade coffee offers its greatest relative benefit to growers, the consumer, the café, and the roaster together benefit 150 times as much as the producer from a cup of fair trade coffee.

  “So, everybody, let’s see how many of y’all are smarter than a fourth grader: Even in a coffee price crisis when fair trade has its maximum benefit at a third of a cent per pound, guess how many fair trade lattes it would take to buy $100 of education for Guatemalan kids?” A few people around the table grinned and tried it on their open laptops. It was $100 divided by $0.0033 and then multiplied by the forty lattes per pound of coffee.

  An undergraduate proudly responded before most people finished: “1.2 million lattes.”

  “You got it, Junior. That’s about four million bucks spent on fair trade lattes to buy $100 of education for the niños. Yes, folks, I think we’ve somehow stumbled upon it—the most inefficient development program ever devised by mankind.”

  Rich sat down. Angela glanced around. There was an awkward quiet in the room. It was a large number of lattes. Josefina Reyes and Rudolph Goldhard sat in dumbfounded, staggered silence. The heat rising from Norman Blowner’s forehead rendered the conference room radiator redundant. He spat, “I trust that you will not be applying to FairCaf after graduation, Mr. Freeland.”

  “Wouldn’t dream of it, sir,” said Rich as he pulled his flash drive from the computer.

  One of the senior professors involved in the study spoke for the first time, his large mane of gray hair reflecting a crown of wisdom that had accrued over years of studying the myriad failures and comparatively few successes of antipoverty efforts. “The research Sofia will present will likely explain why you have these results. What we are seeing here is the product of well-intentioned people creating a faulty institutional mechanism that unfortunately undermines its attempt to help coffee growers. The flaw is a bit subtle, so I’m going to tell a story that illustrates what is happening.”

  The professor began the story. “Once there was a rich man who wanted to help people in a poor country. The people there were so poor that all of them earned only one peso an hour from their labor in the field. The rich man flew down to the country and established a small office in the countryside where he would sit behind a desk and hand out a peso at a time to each who came. People would wait in line to get their peso, which they would receive after filling out a small amount of paperwork. Then the next person in line would get his peso.

  “One day an economist was visiting the area and asked what the man was doing. ‘I am helping poor people,’ said the rich man. ‘I have given away much of my wealth—one peso at a time—to thousands who have come to me for help.’ And the rich man was not lying. Indeed, he had given exactly what he said.

  “But the economist then turned to the person at the front of the line and asked him how long he had been waiting for his peso. ‘About an hour,’ said the man, who now had reached the front of the line. ‘The line is always about that long. I should know; I’ve been through it several times now.’ And this was so, for every time the line was less than an hour long, it was worth it for one of the villager
s to stand in the line to get his peso. If the line ever became longer than this, people would realize the wait was no longer worth it, leave the line, and go back to work.

  “The rich man asked the economist why he was talking to the people in his line. ‘Because you haven’t helped anyone,’ said the economist. The rich man responded, ‘That’s not true—I have given away hundreds of thousands of pesos to these people!’ But the economist replied, ‘Yes, but since everyone can get a peso, the opportunity cost of these people waiting in line to get the peso has been equal to the peso they were given.’

  “Now a few people overheard the conversation between the economist and the rich man. Coming to their senses, they realized that there was nothing to be gained from waiting in the line to receive the peso. But when they left, the line became shorter, and thus it became worth waiting in line for the peso again. So the people returned to the line. The rich man, now frustrated with the situation, decided to increase his giving: instead of giving people a single peso, from then on he would hand out ten peso bills. But as soon as people found out the news, the wait in the line increased dramatically—to ten hours. The economist left and went back home, because he didn’t have the heart to tell the rich man that he was doing no more good for the people than before.”

  The professor smiled at his story. So did the others around the table, except for Goldhard, Blowner, and Reyes.

  “Correct me if I am wrong, but I think I understand the parable,” said Angela to the others around the table. “It’s a problem of free entry into fair trade certification. Because the market for fair trade is limited, the more coffee growers around the world that become certified for fair trade, the lower the percentage of the crop the cooperatives are able to market as fair trade coffee, so that the people who are supposedly helped by these well-intentioned efforts in the long run are no better off than anybody else.”

  “Yes,” said the professor. “It is an unsettling paradox.”