Guaranteed Minimum Price Contracts for Some, an Insurance for Others?

This paper analyzes the impact of guaranteed minimum price contracts between sub-groups of farmers and a fair trade manufacturer on the spot market price. We focus on the fair trade concept in the coffee supply chain as an example. We analyze a three level vertical chain gathering perfectly competitive farmers upstream who offer their raw product to manufacturers who then sell finished products to a downstream retailer. Without fair trade, all the raw product is sold on the spot market. When a sub-group of farmers benefit from a guaranteed minimum price contract offered by a fair trade certifier, we show that farmers outside of this fair trade agreement may also benefit from a higher spot market price in cases of a limited overproduction.