Fair trade represents an innovative approach to make the rules of global trade work for disadvantaged producers in the South and for sustainable development. But who are the real beneficiaries of fair trade? Has fair trade resulted in any discernible improvements in the lives of small coffee producers and their communities? This paper examines the effectiveness of fair trade as a development tool and the extent of its contribution to the alleviation of poverty in coffee-producing regions of Nicaragua. The paper argues that it is crucial to analyse the experiences and problems of small coffee producers and producer organisations involved in the fair trade market to ensure that the objectives and claims of fair trade are achieved in practice. The study concludes that there are limits to the extent to which fair trade can significantly raise the standard of living of small coffee producers because of factors such as the debt problems faced by cooperatives, lack of government support, and volatile international coffee prices.