1. Conformity to Quality Standards in International Tea Markets The Case of South Indian tea Marianne 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.) 1)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. 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. 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