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Tea: Executive brief

May 2008

Summary

Of the 36 world tea producers, 19 are ACP countries, including the third largest producer, Kenya, which is also the world’s largest exporter. Tea is grown both on plantations and by small growers, and is mainly sold by auction, but the industry is dominated by a few vertically integrated companies, and there have been charges of collusion. Although price trends have been downwards, and in real terms producers now receive less than half what they did 30 years ago, output continues to rise. The EU is an important market for ACP countries and applies no tariffs (with a minor exception).

There are a number of areas in which the EU could help ACP producers, for example by acting with them to reduce the abuse of dominant market positions by large companies. It could also help to promote the use of Geographical Indications and could expand its ‘aid for trade’ financing. The fair-trade market is of growing significance, and other ‘luxury purchase’ developments could yield higher earnings for responsive producers in the future.

1. The international tea market

1.1 Market break-down

There are two major types of tea, black and green. Black tea accounts for around 75% of global production and over 90% of the market in Western countries. Black tea results from leaves that are fully oxidised, while green tea leaves are steamed, rolled and dried without any oxidation. Most green tea is grown in China and is gaining popularity in the West, partly for health reasons.

FAO projections for the ten years to 2017 indicate that world black tea production will grow at 1.9% annually from about 2.5 million tonnes in 2006 to reach 3.1 million tonnes while world green tea production is expected to grow at a considerably faster rate of 4.5% annually to reach 1.57 million tonnes.

It believes that in these years the expansion of tea production could substantially exceed growth in consumption, with the current situation of market balance being transformed into one of growing surplus production. This could serve both to depress prices and reduce ‘returns to producers in developing countries’. In this context increasing attention is being paid to ‘expanding consumption in producing countries’ and getting to grips with the challenge of establishing quality standards. According to the FAO ‘better quality should increase demand while preventing low-quality tea from being traded should curtail the over-supply situation in the world tea market.

1.2 Global production and consumption

Tea is grown in 36 tropical and semi-tropical countries, 19 of them ACP countries. The six largest producing countries - India, China, Kenya, Sri Lanka, Turkey and Indonesia (in that order) - account for 80% of world output. Less than half of production is exported, as India and China, in particular, are major consumers as well as producers.

Global tea production has grown by around 2% a year since 1993-95, but consumption in Western countries has grown by barely 1%. In a number of developing countries, however, consumption has kept pace with, or exceeded production. Global production grew by over 3% to 3.65 million tonnes in 2006. World tea consumption grew by 1% in 2006, reaching 3.64 million tonnes. China’s total consumption overtook that in India, following an increase of 13.6%. For India, the annual tea consumption growth at 2.51 percent was considerably higher than the annual trend of 1.6% on average over the previous decade.

In 2006 China accounted for 28.8% of world output, followed by India, 24.5% and Kenya and Sri Lanka on 8.5% each.

Tea production

Main world producers and leading ACP producers

Production in 2006 (tonnes)

China

1,049,500

India

892,730

Sri Lanka

310,800

Kenya

310,580

Turkey

204,600

Indonesia

171,410

Malawi

38,387

Uganda

34,334

Tanzania

30,300

Zimbabwe

22,000

Rwanda

16,000

World total

3,649,491

Source: FAO

 

As China, India and Sri Lanka are also major consumers of tea they fall behind Kenya as the major exporter. In 2005 ACP countries account for only about 13% of production, but 29% of exports. Beyond Kenya, other ACP exporters represent only 8% of total exports, Uganda, Malawi and Tanzania exporting more than 20 000 tonnes each in 2005.

1.3 How the tea market works

Tea is unusual among major agricultural commodities in that it is sold through auctions or in private deals, increasingly on-line. Unlike coffee or cocoa, there is no futures market for tea.

There are two auction centres in ACP countries, both in Africa. The major centre in Mombasa, Kenya, offers between 60,000 and 90,000 packages of tea every week, with teas mainly from Kenya, but also from Uganda, Rwanda, Tanzania and Zaire. The other auction centre, in Limbe, Malawi, sells teas from Malawi and occasionally from Mozambique, Zimbabwe and Zambia. Due to the seasonal nature of Malawi's tea production, the auction operates weekly for the six months of the season - between December and May - and fortnightly thereafter.

On-line tea auctions have recently been set up alongside traditional auctions. These speed up access to information and facilitate participation. Bids can be submitted at any time and the sale process is not geographically confined. Transaction cycle times and the stages in handling are reduced. Also, teas need not be transported to warehouses as inspections can be done using samples couriered to buyers from the plantations.

Although the auction system would seem to approximate a 'fair market' in which prices are determined solely by the interplay of supply and demand, the system does not always work well for small-scale producers. Auction prices vary considerably with both the quality and quantity of tea on offer, and the demand for tea at any given time.

There is evidence of collusion among brokers to influence prices. A number of investigations have revealed 'a high degree of collusion that prevails in buying and ... wide scope for collusion between brokers and buyers'. Such collusion, if it occurred, would tend to reduce the price at which producers could sell tea at the auctions, and would also affect prices of direct sales. Indeed, in 2005 the situation was deemed so bad the Kenyan National Chamber of Commerce called for the elimination of tea auctions.

The extent of this alleged collusion by buyers raises important issues of competition policy, of the kind the EU has routinely taken action against in the sugar sector within the EU.

1.4 International producers and traders

A small number of companies dominate the tea industry. They have a presence at almost all stages of the journey of tea from tea bush to tea bag or packet. The companies buy their tea at an early stage of production, and usually carry out the high-value-added blending and packaging (which account for 80% of the retail price), at facilities in the EU and other Western countries.

Blending means that many tea qualities have become exchangeable and are bought wherever they are cheapest. The major companies are not reliant on any one particular source and can easily freeze out a particular producing country if it does not co-operate with the needs of the company.

The UK/Dutch company Unilever is the world's largest supplier of black tea. With tea estates in India and eastern Africa it has an estimated 15% share of global black tea sales. Its subsidiary Brooke Bond Kenya is the country’s largest plantation company with an 11% share of output. In July 2004 the company changed its name to Unilever Kenya Tea. Unilever’s major brands (including Lipton, PG Tips and Red Label) have an annual turnover in excess of €2.35 billion and are available in more than 100 countries. Unilever's Lipton Yellow Label is the world's most popular tea brand.

James Finlay Ltd produces around 55,000 tonnes of tea each year on its plantations in Kenya, Uganda, Bangladesh and Sri Lanka.

Tata Tata Ltd (India) has 18 subsidiaries worldwide and a significant presence in 35 countries. It owns more than 70 estates in India and Sri Lanka, produces over 60,000 tonnes of black tea and in 2003 acquired Tetley, the second-largest tea-bag brand worldwide. This level of industry concentration also raises competition policy issues.

1.5 Major trends in the market

There is no single world price for tea, but rather differing prices at different auctions. The price trend until recently has been downward. World Bank figures suggest that between 1970 and 2000, tea prices fell by 44% in real terms. However, the FAO composite price index, a world indicator price for tea, shows that tea prices are slowly increasing since 2002. After two years decrease between 2000 and 2002, the price for tea increased by 31.7% in 5 years; in recent years it rose by 6.5% to $1.95 per kg in 2007 after an 11.6% rise in 2006, in a sign that global oversupply of tea was improving. According to FAO simulations, ‘tea prices are expected to maintain their upward trend in 2008 as a result of a tight supply on the world market exacerbated by a projected 10% decrease in Kenyan production due to the current civil unrest in this country […] [and] given current demand elasticities of the major players in the tea market, it will take 3 years for the market to adjust to this price shock.”

Year

FAO Composite prices- US$/kg

Annual growth rate

2000

1.8

 

2001

1.56

-13.3%

2002

1.48

-5.1%

2003

1.52

2.7%

2004

1.66

9.2%

2005

1.64

-1.2%

2006

1.83

11.6%

2007

1.95

6.6%

Source: Committee on commodity problems- Intergovernmental group on tea- Current situation and medium outlook- May 2008

ftp://ftp.fao.org/docrep/fao/meeting/013/k2054E.pdf

However a longer term analysis indicates that after taking inflation into account, the real price of tea has dropped substantially. In real terms, producers now receive less than half what they did 30 years ago. While technological innovation and the development of new teas has led to some expansion of the market, they have increased world output of tea and reduced prices without affecting global demand significantly. In the absence of supply-management strategies, production has outstripped demand.

Tea prices have nonetheless fluctuated less dramatically than coffee prices, giving small-scale tea growers a little more certainty than coffee farmers.

Auction centres could become redundant with technological advances. At present almost all tea fields are located in regions where land-phone lines intermittently fail or do not exist. With the development of the internet through mobile phones, however, and given that many plantations are financed by large companies, tea estates will in the future be able to post real-time data daily onto the internet, enabling a viable futures market.

The global process for bringing buyers and sellers more directly together is already taking place with catalogue sales of premium tea. ACP producers need assistance to access information to enable them to exploit on-line auctions.

2. The production structure of the ACP tea sector

The 19 ACP tea producers are Burundi, Cameroon, DR Congo, Ethiopia. Kenya, Lesotho, Mali, Malawi, Mauritius, Mozambique, Nigeria, Papua New Guinea, Rwanda, Seychelles, South Africa, Swaziland, Tanzania, Uganda and Zimbabwe. All but Lesotho, Mali, Nigeria and Seychelles export tea.

Kenya accounts for over half of the tea output in ACP countries. Malawi, Uganda and Tanzania are the next largest producers, (in that order) with Malawi’s production about 15% of Kenya’s.

Globally, most tea is grown on plantations. In the ACP countries, small-scale growers are also prominent; in Kenya, they account for about 60% of the country’s tea production. Smallholders often grow tea bushes alongside staple crops for their own consumption, with the tea providing a cash income.

Outsourcing is practiced in some countries - in Zimbabwe and Malawi, for example - with growers using their own plots to grow tea on contract for plantations. Only the smallest producers farm their land entirely with family labour, and many smallholders employ workers, often on a casual basis.

On plantations, the use of child labour seems common in many of the poorer tea-producing regions, due to the economic conditions of the household and lack of schools. A recent survey by the Malawi Congress of Trade Unions found, for example, that child labour is a very serious problem in many tea (and also tobacco) plantations.

Low prices for tea tend to be passed on to the poorest segments of a country in the form of low wages on plantations. Given that it is easier to cut costs (by reducing labour costs) than raise prices (it is impossible for a producer country to attempt this unilaterally), producing countries have to remain competitive by lowering wages – which partially accounts for the rut in which plantation wages are caught.

Labour costs account for over half of the cost of production, and approximately 75% of that arises in plucking. There is downward pressure on farmers’ incomes and labourers' wages and working conditions, even though the proportion of wages in the consumer price of tea is low.

Tea production and exports of ACP countries and other major exporters to the EU

 

Production (tonnes) 2006

Exports to EU in 2006 (tonnes)

ACP

   

Burundi

7,500

88.5-

Cameroon

4,000

-

DR Congo

1,400

11.6

Ethiopia

3,900

81.5

Kenya

310,580

85,137.5

Madagascar

550

-

Malawi

38,387

10,863.3

Mali

150

 

Mauritius

1,567

35.7

Mozambique

10,500

496.9

Nigeria

n/a

9.8

Papua New Guinea

9,000

1,523.4

Rwanda

16,000

451.4

Seychelles

189

-

Tanzania,

30,300

4,786.3

Uganda

34,334

176.7

Zambia

750

22.3

Zimbabwe

22,000

4,545.3

Total ACP

>491,107

>107,830.2

Other exporters

   

India

892,730

41,661.8

China

1,049,500

32,850.1

Sri Lanka

310,800

22,657.6

Indonesia

171,410

29,624.3

World total

3,649,491

274,836.7

Sources: FAO; EC Helpdesk

ACP countries thus account for around 13% of world production and 43 % of the EU’s imports.

2.1 The competitiveness of ACP tea

Yields of tea and the cost of producing it vary enormously from smallholder to estate, estate to estate, and country to country. In Kenya the estate sector is the most efficient with yields of about 2,670 kg/ha compared to 1,167 kg/ha in Sri Lanka. This is reversed in the smallholder sector; in Kenya, yields from smallholders average only 1,651 kg/ha as against 2,217 kg/ha in Sri Lanka. The low level among Kenya smallholders is attributed to low levels of fertiliser usage, poor husbandry practices and inferior management. Paradoxically, tea smallholders in Kenya generally earn more than tea workers, many of whom would prefer to be smallholders.

The Kenya Tea Development Authority pays a minimum of Ksh 7.50 (US cents 9.5) per kg to smallholders and outgrowers. Growers in Uganda receive US cents 10.4-15, those in Rwanda US cents 9.5, and those in Malawi US cents 7.5.

2.2 The economic significance of tea to ACP countries

Tea output is increasing in the ACP group as in other tea-producing areas. Kenya’s production increased from 236,286 tonnes in 2000 to over 328,500 tonnes in 2005, while its exports increased even faster, from 217,290 tonnes in 2000 to 313,200 tonnes in 2005. Tea accounts for around 20% of Burundi’s total exports, 18% of Kenya’s, 12% of Rwanda’s and 7% of Malawi’s.

Uganda and South Africa are vigorously developing their tea sectors, the latter partly through red tea (rooibos), worldwide export sales of which increased by 400% between 1998 and 2003. Studies carried out in South Africa have shown that rooibos is rich in antioxidants and may help protect against damage that can lead to types of cancer and heart problems (note: strictly rooibos is not a tea).

There is a danger that expansion could have a negative effect on world tea prices, especially given the near stagnant demand for tea in many Western countries.

3. The EU regime

The EU has no restrictions on the import of tea, nor does it have quality standards. The EC describes tea as 'a totally liberalised market'. The most favoured nation (MFN) tariff is zero, and there is no tariff escalation if tea is processed. However, on small packages only, a rate of 3.2% ad valorem tax applies on imports into the EU of ‘green tea (not fermented) in immediate packings of a content not exceeding 3 kg’; on black tea the rate is 0%. There were therefore no significant issues related to tea during the EPA negotiations, and countries failing to sign interim EPAs did not face tariff rises as in the case of some other commodities.

According to the EC, the main issue concerning the tea sector is the way its producers are unprotected from 'copycats'. Around 10,000 tonnes of 'Darjeeling' tea, for example, is produced from the estate in Darjeeling, India, but 30,000 tonnes is sold under this designation around the world.

The EC would like to see an international register of food-and-drink products that are made from a special recipe, or are from a specific region, that are not allowed to be copied. The March 2005 WTO ruling on Geographical Designations of Origin should help ACP countries that want to develop regionally specific teas. The EU believes that the ruling upholds its system of granting protection to products with specific geographic origin (GIs).

4. The importance of the EU market globally

Global tea imports in 2005 totalled 1.39 million tonnes, of which the EU imported 323,930 tonnes, 23.7% of the total. In 2007 the UK imported 151,271 tonnes, 56.3% of EU imports. Germany was the EU’s second largest importer with 16%. The EU share of global imports rose with the entry of Poland, a major tea-consuming country, which imported 23,212 tonnes in 2007 (8.6% of EU imports).

The EU’s historical relationship with ACP countries lays the basis for cooperation, given that EU countries do not grow tea. The entry of Turkey, the world’s sixth largest tea producer, into the EU could change this and cause considerable, but as yet unknown, repercussions for ACP countries.

The EU gives financial support to tea projects in ACP countries. The Smallholder Tea Development Programme in Uganda, for example, was assisted with €20 million from the European Development Fund. The objective of the project was to develop Uganda’s smallholder tea subsector and make it profitable, and to increase farmers’ real income, employment opportunities and foreign-exchange earnings.

ACP countries could gain, believes the EU, if the WTO were to extend the extra protection for GIs, currently limited to wines and spirits, to other products including commodities - Kenya tea, for example. 'There is ample evidence that geographical indications are instrumental in fostering market differentiation leading to premium prices. The resulting consumer recognition and product reputation should therefore be safeguarded against unfair competition and imitations via WTO-wide rules', according to an EC report.

5. Challenges and opportunities for the ACP tea sector

5.1 The need for investment to improve quality and add value

Investment is needed to raise the general quality of ACP teas which tend to be low. This is reflected in the comparative prices at the Mombasa auction on the one hand and the Indian and Sri Lankan auctions on the other. For instance in January/February 2005, tea fetched an average of US cents 154.4/kg in Mombasa compared with US cents 194.2/kg at the Colombo auction.

More investment is also needed to produce speciality teas. Teas in this category from Kenya and Rwanda and other ACP tea-producing countries are in demand and have attracted good prices. Speciality teas from India have earned a reputation for high quality and fetch very good prices. A batch of genuine Darjeeling tea, for example, fetched a record, if exceptional price, in 2003 of £223/kg., compared with less than £1/kg for ordinary teas.

Tea-producing countries would profit from expanding into upstream activities, adding value in their own country, and generating additional employment, income and revenue. Efforts by producers to enter activities such as blending have been hampered by poor market information and inadequate marketing strategies, aggravated by a lack of funding. The Kenya Tea Development Agency (KTDA), which processes and markets tea on behalf of its 370,000 smallholder owners, wants to reverse this. In March 2003 it announced plans to blend KTDA tea with cheaper African teas and sell them in branded packs to foreign markets. In early 2004 the KTDA announced that three new tea brands are being produced in Kenya for export: green, orthodox and flavoured tea. The development of the products was inspired by a need 'to meet new customer demands'.

New strategies aimed at adding value and reducing production and marketing costs are also needed, especially to meet changing tastes

5.2 Exploiting the ‘fair trade’ market

An increasing number of tea growers and plantation workers are benefiting from selling their tea in the fair-trade system, with a 'Fairtrade' label. Products are certified by the UK-based Fairtrade Foundation.

Fairtrade certified tea is sourced from tea estates and democratic small-farmer organisations under terms of trade which include:

  • fair wages and working conditions for employees;
  • payment of a negotiated fair price to producers (estates and smallholder organisations);
  • an additional premium for investing in social, economic or environmental programmes.

The ‘fair trade’ tea industry is growing rapidly, from 1,964 tonnes in 2004, to 5,413 tonnes in 2007, representing a 175% increase in three years. But this still represents only 0.5%, 2% and 5% of the market shares in the UK, Germany and Switzerland respectively in 2005.

CaféDirect, a UK-based fair-trade company, sources tea from east Africa and Sri Lanka for sale under its Teadirect label. With a 34% year-on-year growth by value, Teadirect is the fastest growing tea brand in the UK retail market. Farmers who grow tea for Teadirect receive a guaranteed minimum price of US$1.95/kg, some 40 cents a kg higher than the Mombasa auction price in early 2005. In addition, a premium of €0.50/kg or €1.00/kg, depending on the type of tea, is paid for the improvement of the socio-economic situation of the workers, their families and communities.

A growing percentage of fair-trade tea, almost 40%, comes from small-scale growers. Another major UK-based company Traidcraft, buys chiefly from Uganda and Tanzania. More than 70 fair-trade teas are now marketed, both tea bags and loose tea, and including 'organic' and green tea.

The Fairtrade label is monitored by the German-based Fair-trade Labelling Organisation International (FLO), which sets standards under which tea can be sold, and is working with 79 tea-producing organisations from six ACP countries, including fifteen in Kenya, five in Tanzania and in South Africa, three in Uganda, two in Malawi and one in Burkina Faso.

An FAO 'Tea Mark' was launched in December 2002. This is intended to be an international mark to promote tea’s health benefits. The tea boards of India, Kenya and Sri Lanka have been involved.

The Kayonza tea-processing factory in Uganda is an example of involvement in the fair-trade system. The factory is collectively owned by about 3,100 smallholders, who together cultivate 1,300 hectares of tea, but most work very small plots of land (usually less than 0.2 hectares under tea). They took over the factory after it was privatised.

5.3 Other trends

There are some other favourable trends: a Teadirect report refers to some 'amazing advances in tea drinking'. It predicts that our cup of tea, what's in it and the way we drink it will have changed beyond recognition by 2010: 'Tea looks set for a massive revival over the coming years, helped along by new inventions and lifestyle trends'. Tea will also be put to new uses: 'Trendy tea - tea will come to reflect our life-style choices and values. Hip bars in France, the UK and the USA are already serving champagne teas and Earl Grey martinis'.

In an effort to make tea more convenient to prepare, the tea industry has introduced a ‘tea tablet’. Invented in Japan, this could help to widen the market. Scientists at the world's largest tea-research facility, in Assam, India, are also reported to have developed a tea tablet. However, instant tea was a commercial failure when introduced into the UK about two decades ago.

6. Conclusion

While there are no tariff issues in EU-ACP trade relations in the tea sector, this does not mean that there are no issues that need to be addressed. Internally, the EC has routinely used provisions of its competition policy against ‘abuse of a dominant market position’ to prosecute and fine EU sugar companies for collusion in setting sugar prices. The question therefore arises: will the EC agree to joint ACP-EU action against international companies which collude in setting prices of major commodities such as tea, thereby abusing a dominant market position?

There also appear to be a number of key ‘aid for trade’ issues in ACP-EU trade relations in the tea sector. We might ask whether the EU will be willing to use:

  • ‘aid for trade’ instruments in a structured and systematic way to assist in developing tea production in ACP countries which serves the ‘quality’ end of the EU tea market, thereby improving the prices received for teas?
  • ‘aid for trade’ support to assist ACP countries in developing production for the ‘fair trade’ market and in further promoting this market within the EU?
  • ‘aid for trade’ support to assist ACP countries in procuring the technical expertise to be able to move up the tea value chain through developing blending operations to serve EU markets directly?

Initiatives in these areas could greatly help ACP countries increase the value obtained from tea production.

The importance of growing demand for tea and regulating the quality of tea traded internationally would appear to be the kind of programme which the ‘All-ACP’ agricultural commodities programme funded by the EC should support.

Source

The Tea Council (UK)
www.teacouncil.co.uk

FAO
http://www.fao.org/newsroom/en/news/2008/1000784/index.html

http://www.fao.org/newsroom/en/news/2008/1000836/index.html
http://www.fao.org/newsroom/en/news/2005/105404/index.html
http://www.fao.org/docrep/meeting/009/j5316e.htm

FAO, May 14th 2008
http://www.fao.org/newsroom/en/news/2008/1000836/index.html

Source: Committee on commodity problems- Intergovernmental group on tea- Current situation and medium outlook- May 2008
ftp://ftp.fao.org/docrep/fao/meeting/013/k2054E.pdf

Africa News network on tea
http://africanagriculture.blogspot.com/search/label/tea

EC Export Helpdesk
http://exporthelp.europa.eu/index.html

Hindu Business Line, May 24th 2006
http://www.thehindubusinessline.com/2006/05/24/stories/2006052402130800.htm

The EU's position on geographical indications (GIs)
http://europa.eu.int/comm/trade/issues/sectoral/intell_property/argu_en.htm

The Tea Market: A Background Study Oxfam 2002
www.maketradefair.com/assets/english/TeaMarket.pdf

EC: 'Agricultural Commodity Chains, Dependence and Poverty - A proposal for an EU Action Plan', February 12th 2004, COM(2004)89 final.
http://europa.eu.int/eur-lex/en/com/cnc/2004/com2004_0089en01.pdf

Fair-trade Foundation, London: 'Producer Profile, Kayonza Growers Tea Factory, Uganda', via
www.fairtrade.org.uk

Africa Tea brokers Ltd
http://www.atbltd.com/

FLO website
http://www.fairtrade.net/tea.html

Fair Trade in Europe 2005, FINE
http://www.european-fair-trade-association.org/Efta/ff.php

International Tea Committee
www.intteacomm.co.uk

'Health benefits of red tea boosts sales', All news, November 25th 2004
http://beveragedaily.com/news/ng.asp?id=56330&n=wh49&c=#emailcode

'Assam gives the world first tea pill', Hindustan Times, March 19th 2005
www.teaforums.com/viewtopic.php?t=729 




© Copyright 2004 Technical Centre for Agricultural and Rural Cooperation ACP-EU. Email: c...@cta.int
The opinions expressed in the comments and analysis are those of the authors, and do not necessarily reflect the views of CTA.
Technical Centre for Agricultural and Rural Cooperation ACP EU
 
 

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