A massive transformation happening in the Indian tea industry
The tea industry of India is going through a kind of transformation that no one has witnessed since the commencement of commercial tea plantations in 1834. The consumption of tea in India has continuously gone up from 653 million kilos at the beginning of this century to 1090 million kilos in 2018. It means every year, Indian consumption has gone up by 24.2 million kilos of tea.
A study conducted by Deloitte on behalf of the Indian Tea Board summarises that 75 percent of the consumers in rural India now buy packet tea instead of loose tea. Typically speaking such a situation should be considered as most sustainable for the Indian tea industry. Yet, we saw in August 2019, The Indian Tea Association (ITA) made an appeal to the Indian Government seeking its intervention for the revival of the tea industry. The fundamental proposition of the appeal was to fix a minimum price for tea in auctions because Regulated Tea Gardens are facing an imminent crisis of sustained low prices that is lower than the cost of production.
Constantly falling tea prices
The average auction prices at the turn of the decade were Rupee 110 per kilo of black tea for Assam and now stands at Rupee 148 per kilo at the end of the decade in 2019. Such price increases are not remunerative even if we avoid adjusting this price against inflation. The costs of inputs, wages, fuel and even interest rates have all gone up at a much faster pace than this growth in prices. The Regulated Tea Gardens pay provident fund and gratuity and provide housing, ration, firewood and medical benefits.
Are Smallholder Tea Growers unaffected by low prices?
Often I have come across theories that the smallholder tea growers are the primary beneficiary of this growth in production and consumption of tea. Such opinions use the logic that smallholders have young bushes, more productivity, no social and statutory obligations. Therefore they could produce more tea and after processing by the Bought Leaf Factories could sell it at cheaper rates. Unfortunately, this theory is simplistic and ignores many other dimensions.
The smallholder tea growers segment often works with their family labour and takes enormous financial risks. Even when we keep the opportunity costs aside, as per some analysts, the average cost of production for a smallholder tea grower would not be less than Rupee 15.00 per kilo of green leaf in Assam. Of course, this amount will be always hotly contested depending on the segment of the industry one belongs. But even if you change the figure one way or another by a few percent, it doesn't change anything. The smallholder tea growers have an average landholding of less than 1 hectare and roughly produce an annual average of 11,000 kilos to 13,500 of green leaf per hectare. From here, the calculation is not that difficult. In other words, tea producers, both Regulated Tea Gardens and smallholder tea growers, are facing challenges of the high cost of production and low price realisation.
How does it impact tea brands?
Brand market power and the relatively higher margins of leading tea packers and retailers have been the story of the tea sector so far. One can visualise not only in tea but in many other industries that a rising share of total income is earned downstream, with enormous mark-ups and returns for intangibles such as brand. But in the long-run, the starkly contrasting situations of profitable downstream actors and suffering upstream ones may lead a niche segment of consumers as well as shareholders to actively question whether the tea brands they trust support producers' economic sustainability. Such consumer behaviour is increasing abroad and also in a small way in India as well which is reflected by the spate of sustainability certifications undertaken by the domestic tea brands.
Climate change and SDGs both get affected by the low prices in tea
The economic challenges have a direct correlation to the series of environmental and social challenges faced by the tea industry. Preliminary assessments by the Tea Research Association have shown that climate change is impacting the tea producers in a significant way as tea is mainly grown under rain-fed mono-cropping systems and weather conditions determine optimal growth. The research states that unless we take adequate adaptive measures, tea may not survive in Assam plains by 2050.
Excessive rains are creating erosion of topsoil, leading to a negative impact on production. Producers have to buy more fertilisers to maintain soil fertility and spray more pesticides to tackle new pests that are emerging. It does not only increase the cost of the tea production but also affecting food safety issues which are one of the top buying concern of most of the packers.
On the social front, the north-Indian tea gardens are barely managing to meet the wages and statutory requirements. The amount of informal work is increasing in the tea sector. The social progress of the tea workers community who have a higher aspiration due to access to global information today has been relatively plodding. It is clear that with the kind of non-remunerative pricing prevailing in the tea production segment would make meeting the SDG targets a challenge in the tea regions.
Piecemeal efforts on sustainability through certifications
For many years, it was felt that certification of the tea producers by third party social auditors under a sustainability code supported and financed by tea packers together with International NGOs would create lasting sustainability in the tea production and trade. Fortunately, such a myth doesn't exist anymore even though Indian producers (small and big) have more certificates from these auditors than any other time in history. While certification does provide reputational benefits to the tea packers, there is no business case for the tea producers to get themselves certified through such an expensive third-party auditing process.
Harvard Business School study (2011) “Sustainable Tea at Unilever” suggested that Unilever's marketing of certified tea with the slogan “Make a Better Choice with Lipton, the world’s first Rainforest Alliance Certified tea” led to an increase in sales by 11 percent in the UK market. Ironically, in 2020, Reuters reported that Unilever is rethinking struggling PG Tips and Lipton brands of tea including options of partial or full sale of the business. So, if there is no business case for classical certification driven sustainability for brands or producers, who is benefitting from such certification process?
As we have seen before, contrary to their hopes, creation of a third party auditing layers between the producers and tea packers, doesn't even de-risk the supply chains. Such limitations of the sustainability standards are not unique in the tea sector, but most of the other crops across the world. No wonder, many creators of the sustainability standards like Fair Trade and Rainforest Alliance are now talking about "reimagining certification".
The way forward
Indian tea industry stakeholders have to acknowledge the grave sustainability concerns, particularly in light of the ongoing price crisis and impending climate crisis. We suggest the following pathways for a discussion amongst the stakeholders.
Joint platform of STGs and RTGs and setting up of a fund
Launch of the Trinintea programme
Trinitea programme was started in 2019 by one of the tea industry's oldest association, Indian Tea Association, and Solidaridad, one of the world's oldest sustainability organisations. The programme seeks to provide technical support by experts for the smallholder tea growers to cope with climate change and link them up with high-value supply chains. For the first time, the Smallholder Tea Growers Associations have joined International Tea Association as associate members under the aegis of the Trinitea programme whose secretariat is based out of International Tea Association.
The Trinitea platform should set-up a pre-competitive fund to focus on the collective goals of the tea producers. This fund could come from the donors, brands, industry and the Government. The fund should focus on developing comprehensive climate change adaptation strategies, strengthen the Smallholder Tea Grower associations, facilitate setting up cooperative processing factories, facilitate market access to the smallholder tea growers, set up a minimum quality framework and improve capacity to enforce social and environmental concerns better. Tea has the least amount of global climate funding compared to comparable commodities like coffee and cocoa. It ought to change now.
Increase the profitability of the tea producers
The tectonic shifts in the Indian tea industry have created new challenges for many producers but also opened up new opportunities. In particular, the coming together of smallholder tea growers and Regulated Tea Gardens, and the mainstreaming of e-commerce technologies and mobile applications for farmers, provide unique conditions to depart from the traditional tea business model that has become increasingly unsustainable for many tea producers. I suggest that Regulated Tea Gardens and smallholder tea growers under one platform should consider three distinct possibilities.
Firstly, the Regulated Tea Gardens and smallholder tea growers should engage with the Indian Government to set up minimum benchmark prices for different grades of manufactured tea to promote the growth of the sector and push exports.
The minimum benchmark price should be based on a cost-plus model after undertaking a thorough calculation. Similarly, there should be an engagement for setting up a benchmark pricing for acceptable standard of quality of green leaves. The collective action of the RTGs and STGs would convert tea in India from a buyers product to a sellers product setting new quality and price benchmarks for the domestic markets.
Secondly, the Regulated Tea Growers and smallholder tea growers should consider going beyond the production and manufacturing of tea.
Between the producer and the consumer, many entities handle tea, adding and capturing value along the way. It raises the question of whether it is possible to “cut out” some of the middlemen. Yet the significant entities along the value chain all provide essential functions or otherwise add particular value that converts the green leaves into tea bags in our cups. A more appropriate question, then, maybe whether producers themselves can take on more of these steps and accompanying efforts (such as marketing) to create and capture more value?
The development of e-commerce and the internet has the potential to reduce market concentration and provide a means for producers to add and obtain more value through more direct-to-consumer sale models. Although currently niche, direct-to-consumer models have the potential to scale with sustained institutional support. It could include aggregating producers for economies of scale, and making the administrative and logistical aspects feasible for many producers. Producer associations could potentially undertake some of the institutional support needed. Of course, the traditional offline markets would remain the key players in the coming years too. But even here, with digital traceability as is offered by the Trinitea programme would create product differentiation and partnerships with global NGOs would allow a different form of brand building for the producers both in domestic markets as well as export markets.
Therefore, the tea producers associations need to increasingly become tea marketing associations as we move ahead in the next decade.
Develop palm oil as a plantation crop alongside tea
The ecosystem of the smallholder tea growers and Regulated Tea Gardens working together should explore diversifying part of the land to palm oil production. The preliminary studies have shown that tea estates in north-eastern India are suitable for palm oil production. The oil palm cultivation is advantageous for producers due to lack of significant pest problems, no requirement of intensive labour or a massive amount of water and the crop yield brings in high returns.
In Andhra Pradesh, the farmers are reportedly earning around 1 lakh per acre. India is the world's biggest importer of palm oil, spending billions of dollars for its imports from Indonesia and Malaysia. Government of India has already given emphasis to promote Oil Palm cultivation in the North-Eastern States. The funding pattern of the Government of India scheme was a 50-50 share between the Government of India and State Government. Since 2015-16 has been revised to 90-10 share, respectively, in case of North Eastern states. It could provide a significant opportunity to the Regulated Tea Gardens as well as smallholder tea growers for crop diversification and reduce financial losses.
If only 20 percent of the tea estate land is allowed to diversify into palm oil, it will lead to freeing up of 48,000 hectares of land for commercial palm oil production. Since Agriculture is a State subject, Assam Government may seriously explore declaring Oil Palm as plantation crop to facilitate captive farming and rapid expansion of Oil Palm cultivation in the country. It will not only save foreign exchange outflow of our country, provide significantly better returns to the producers, but also create the demand-supply balance for tea so essential to push up the quality and price.
Under current and future market conditions, which include persistent low prices, rising input costs, and devastating climate change effects, even efficient tea producers will struggle to remain viable, and the SDG gap in tea-producing regions of Northern India will grow. Sustainability certifications are not equipped to solve these challenges. The way forward is sustained collective action of smallholder tea growers and Regulated Tea Gardens to set up a pre-competitive platform with a common fund to address climate adaptive tea production, increased role for the premier producers’ organisations towards marketing value added quality tea in India and abroad and combining palm oil with tea in the same business ecosystem. The prosperity of the tea sector relies on healthy and viable farmers, including smallholders; one thing is for sure-this business-as-usual scenario is not sustainable for the workers, brands or the tea industry.
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