Introduction

1. Conformity to Quality Standards in International Tea MarketsThe Case of South Indian teaMarianne Nylandsted Larsen

2. Department of Geography & Geology Introduction • Market concentration high (OECD countries) – few players (large branded tea manufacturers) such as Unilever, Tata Tetley, Twinings • Slow growth in tea consumption in traditional importing countries in Europe – quality differentiation a key strategy in order to stimulate demand and maintain market position • Product differentiation and chain restructuring in European markets fairly well-known, but little is know about product and quality requirements in emerging markets in Asia, the Middle East, CIS countries. • Asia is currently the largest importer, followed by Europe, Africa and Russia

3. Department of Geography & Geology Introduction (cont.) • The ‘tea market’ is highly segmented - Quality requirements and reward structures - Tea products are almost always in blended form (or defined by geographical indicators, single origin) • ‘Quality by design’ (a blend contains different grades (with different ‘quality attributes’); processing methods) • 2) A tendency to move away from spot market transactions to other forms of vertical coordination between producers and processors – quality management • 3) Improvement in quality management practices by small tea growers constrained by high labour supervision and monitoring costs

4. Department of Geography & Geology Outline of presentation • Explore how three groups of stakeholders in the South Indian industry meet (changing) quality requirements in new and existing markets • Exporters – export destinations, quality requirements and sourcing strategies • Bought leaf factories – product differentiation and sourcing strategies • Small tea growers’ conformity to quality requirements

5. Department of Geography & Geology Background - the south Indian tea sector • Approximately 50% of India’s tea exports come from South India. • Approximately 65,000 small tea growers contribute to around 50% of South Indian tea production. • 60-80% of Nilgiris’ production was exported to the Soviet bloc from the mid-1970s to the mid-1990s • Demand: low-quality bulk teas, but relatively high returns for these sales. • 1990s: Expansion of tea production by small growers and rapid growth of Bought Leaf Factories • 1998/99 – a sharp decline in exports to Russia and CIS countries combined with declining global tea prices affected the sector detrimentally

6. Department of Geography & Geology Production of tea in South India

7. Department of Geography & Geology Export companies • Tea estates • Bulk tea and between 70 and 100% exported directly to buyers in Europe (branded tea manufacturers) • The quality of green leaf itself and method of processing are significant to the branded tea manufacturers • Selective plucking methods implemented • Orthodox tea production (converted or increased production) • Third-party certification (ISO 9000 series of quality management and compliance to food safety HACCP procedures)

8. Department of Geography & Geology Export companies (cont.) • Group of blending companies: • Main export countries: Russia, Ukraine (CIS), Kazakhstan, Poland (60-70%) • Export of Orthodox and CTC teas (bulk, blended form) • Packing facilities in consuming countries, several entered the packed tea market • Secondary export countries: Australia, EU, USA, Japan – bulk, blended form (30-40%) • Third-part certification (ISO 9000 series of quality management and compliance to food safety HACCP procedures) • Group of blending companies: • Main export countries: Iraq, Pakistan, Kenya, Russia • Bulk export - CTC blends (low unit price) • None certified against e.g. ISO 9000

9. Department of Geography & Geology Sourcing strategies • Blenders exporting to higher quality segments (including packed tea segments) in Russia, CIS, Europe, Japan, Australia: 50-60% from auction centres while 40-50% purchased directly from few tea estates (orthodox tea) • Blenders exporting to lower quality segments in the Middle East, West Asia, Africa (Kenya): 70-80% from auction centres, 30-20% procured directly from tea estates (orthodox and CTC) and BLFs (CTC) • Import of tea for re-export: Vietnam, Kenya, Nepal, Indonesia • Average unit import price: 50 Rs/kg (34.23 Rs/kg Vietnamese tea) – Average unit price, auction centres: price 66 Rs per kg

10. Department of Geography & Geology Quality differentiation and sourcing strategies by BLF • Dual processing lines (coarse and fine leaf) - 1 to 4 different qualities • BLFs with own tea gardens – supplement with green leaf sourced from small tea growers • Price differential at the auction centre between very fine quality and standard quality of 20-30 Rs/kg ($0,66) • Sourcing strategy: • Re-definition of quality standard (two/three leaves and a bud) and price incentives • Scaled down purchasing through agents, focus on fewer growers and purchase from Quality Tea procurement and Service Centres run by women’s self help groups • However, most of the BLFs focused on volume, not quality

11. Department of Geography & Geology Small tea growers’ conformity to quality requirements? • Tea production highly labour-intensive: • Fine leaf standard (two leaves and a bud) – plucking rounds should be maintained at around 10 days  requires more labour at the same time as the cost of labour increases during the peak season • Lack of sufficient price premium attached to higher quality leaf: • Fine leaf: 20-25 kg per day • Sub-standard/standard leaf: 40 kg per day • Return - fine leaf: 200-250 Rs per working day Return on standard: 320 Rs per working day • Green leaf prices are characterised by intra-seasonal variations •  Focus on quantity instead of quality during peak season

12. Department of Geography & Geology Concluding remarks • 1) A tendency to move away from spot market transactions to other forms of vertical coordination between producers and processors in order to ensure a sufficient supply of high(er) quality teas (branded tea manufacturers, tea estates, blenders and the interface between BLFs and small growers) – quality requirements in different markets • 2) The ‘tea market’ is highly segmented. Differences in unit prices between markets and market segments, but there is always a market – even for poor quality tea • 3) Improvement in quality management practices by small tea growers is of great importance • Major constraints: high labour supervision and monitoring costs and a market system which rewards quantity of output and tolerates deficiencies in output quality

13. Department of Geography & Geology Critical issues that require further analysis: • Emerging markets in Asia and the Middle East may introduce new export opportunities - but it is uncertain whether these markets offer higher returns compared with existing markets (small tea growers and BLFs) •  reward structures of conforming to different quality requirements in different markets need to be analysed. • Farm-level costs and benefits of conforming to different quality grades and how these relate to farm scale and marketing channel need to be invested •  based on an analysis of the small tea grower survey

14. Department of Geography & Geology Unit export prices (selected countries), 2006

15. Department of Geography & Geology Export of Tea, 2006

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20. Department of Geography & Geology Institutional – regulatory framework • Tea board of India: • Launched ‘Quality Upgradation Programme’ (2000) – subsidies • CTC / Orthodox tea • Upgrading of processing methods (BLFs) • Improvement in husbandry practices • Tea Marketing Control Order (2001) – sale of tea through any marketing channel • Liberalisation – duty free import of tea (re-export)

21. Department of Geography & Geology Auction prices, 1995-2006

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23. Department of Geography & Geology Quality of tea and quality standards (cont.) • Tea available at the consumer levels in blended form or defined by geographical indicator (pure Assam, Darjeeling) • Private quality standards set by blending companies / tea manufacturers (though compliance to (voluntary and mandatory) quality and food safety procedures is important • Blending according to specific domestic/regional preferences ‘quality by design’ and information on quality embedded in brands (OECD countries) • A blend consist of different grades, quality attributes and methods of processing • High degree of inter-substitution and flexibility in blending formulas

24. Department of Geography & Geology What defines the quality of tea and quality standards • The quality of tea is made in the field and only preserved in the factory (two leaves and a bud) • Quality differentiated according to grade, processing methods and quality attributes • Auction and private sale: Tea is sold on the garden mark and grade – prices vary considerably between grades. ‘

25. Department of Geography & Geology Main objectives of the project • How quality standards in different end-markets affect terms and conditions for market access for developing countries’ tea products. • To examine the scope and nature of salient quality standards in European and Developing Asian markets and how quality is financial rewarded in these markets • To analyse the distributional effects of conformity to quality standards amongst developing countries and different groups of actors within a country • To identify what national and local institutional conditions are important in achieving improved conformity with quality standards

26. Department of Geography & Geology Exporting countries

27. Department of Geography & Geology Import – major regions

28. Department of Geography & Geology CTC and Orthodox tea – average unit prices

29. Department of Geography & Geology Intra-seasonal variation in prices

30. Department of Geography & Geology Total quantity sold at auctions and total production (million kgs) in South India, 1991-2006