January 1998
Keith Stamp
Tea is a high volume commodity. Its fortunes and fluctuations affect not only individual farmers but the economies of nations. Despite Kenya having recently overtaken Sri Lanka to become the world's largest tea exporter, tea farmers there are anticipating a second successive disastrous year.
In 1995 farmers' livelihoods were squeezed by economic forces. Prices fell as a result of increased production in a period when demand was stable. In this situation, farmers have to grow and pick more tea to maintain the same income and, as usual, the international law of supply and demand hits the poor hardest.
In 1996 it was the forces of nature which caused hardship. Kenya suffered its worst drought in living memory. The rains failed, forcing tea production to drop to a third of normal levels and the temporary closure of some factories. This has had a serious impact both on the national economy and on the lives of tens of thousands of farmers who depend on tea for their income.
Tea comes from an evergreen bush which thrives at fairly high altitude in the wetter regions of the tropics and sub tropics. The plucked green leaf must be processed immediately after harvesting.
There are three types of tea classified according to the processing method:
Black tea - fermented after plucking,
Green Tea - Unfermented,
Oolong - Semi Fermented.
Tea originated in China but its cultivation has spread widely in Asia and Africa. The current significant producers of tea are India, Sri Lanka, Bangladesh, Indonesia, Kenya, Malawi and Turkey, as well as China. Tea from the relatively 'young' tea countries in Africa is often of high quality and stands up well in competition with the traditional tea-producing countries.
In 1995, global tea production remained static at the 1994 record level of 2.5 million tonnes. However, relative production levels in the different producer nations continue to fluctuate. Production from East Africa, particularly from Kenya, is increasing rapidly. While the Kenyan crop increased by 66% in the decade to 1995 to 246,000 tonnes, smaller tea producing nations have struggled to compete - Mauritius closed its last tea factory in 1997.
Because a lot of tea is consumed in some producer countries, the biggest producers are not necessarily the biggest exporters. In 1995, 43% of world production was exported, a slight increase over 1994. Asian exports were more or less stable, with increases from India and Sri Lanka being compensated for by reductions from China. African exports continue to increase, rising by 17%.
Tea which is produced for export is usually of a higher quality and is more susceptible to fluctuations in the market price. This increases the risk to both farmer and exporter.
Tea prices show great variation due to enormous diversity of quality. Unlike coffee, there is no single world market for tea, and prices are subject to strong fluctuations.
In 1995, India accounted for 30% of world tea production. It might be expected that this would give the country a key position in establishing tea prices, but this is not necessarily the case. Although the quantity and quality of the Indian tea crop has some affect on tea prices, the impact is limited. Of far greater importance are the economic relationships between South and North and the power of transnational companies.
In the early stages of economic development, developing countries depend on foreign exchange for financing economic and technical developments and for paying off loans. Export is essential for earning foreign currency. The more a producer country depends on the receipts from tea exports, the more decisive are tea prices for the country's future development.
Since the end of the 1970s, tea prices have hardly changed. So, in real terms, the price has dropped. States such as Rwanda (which earns more than 90% of its foreign exchange through the export of tea and coffee) are particularly badly hit. Lower prices for tea are passed on to a country's less advantaged social groups in the form of lower wages and high inflation.
In order to compensate for dropping export earnings and the subsequent dwindling of purchasing power, many countries extend their cultivated area and expand their export volumes. Between 1980 and 1990, world-wide production of tea increased by more than 40%, although this has now stabilised. Major tea producers such as Bangladesh, India, Kenya, Malawi and Tanzania have extended their tea production area while marginal tea producing nations have found it impossible to compete. Competition has become much stronger since the emergence of the African tea industry in the 1960s.
Tea is usually exported at a relatively early stage in the production chain. Blending and packing, the most lucrative part of the tea trade, is mostly done by the tea companies in the buyer country. The large profits do not therefore accrue to the tea-producing countries. The big money is made abroad. In Europe, 30 to 50% of the consumer price of tea goes to blending, packing, packaging materials and promotion. Many producers have tried to sell processed tea in tea bags or prepacked consumer units, but the export of ready-for-use tea is often hampered by poor market information and the absence of funds for expensive marketing strategies.
The history of tea as a typical colonial product is still reflected in the considerable foreign ownership of the means of production. Following independence, some countries took tea plantations into state ownership. Many of these state owned enterprises are now undergoing privatisation. Factories are sometimes even being sold back to companies based in the former colonist country!
Like many other commodity markets, the tea industry is highly concentrated in the hands of a very few firms. The major players in the tea industry are Unilever, Hillsdown Holdings, Allied Lyons, the Co-operative Wholesale Society, James Finlay and Associated British Foods.
The concentration of the industry is such that the top three firms have a 60% share of the market in the UK, 9 % in France, 67% in Germany and 66% in Italy.
Tea is still grown as a typical plantation product, but tea plantations have both agricultural and industrial features. The work in the tea gardens is basically of a labour-intensive agricultural nature, with planting, maintenance and harvesting done by hand. In tropical areas, the tea can be picked all the year round, with most of the work being done by women. The leaves from the growing tips of the shrubs are plucked into baskets or bags which the women carry on their backs. The full baskets or bags are taken to a collection point, where they are weighed and then transported rapidly to the nearby processing plant which is large-scale and industrial in character. The tea must be processed on the same day as it has been picked. Five different treatments are carried out in the factory where the work is largely mechanised (accounting for only some 10% of total employment in the tea sector).
The situation of the people employed at the plantations can differ both between and within producing countries. Whether tea production is in the hands of plantation owners or state enterprises, it can only survive low tea prices by paying low wages. Many claims for the implementation of labour laws and minimum wages remain unattained for the tea pickers and tea workers. In India, for example, the plantation sector was formally reformed after Independence and laws for the protection of workers were passed. However, implementation of the law is weak, and sanctions for breaking the laws are so minimal that plantation owners are hardly affected. The implementation of the law is thus essentially left to the employers, for whom the improvement of working conditions is not normally the first priority. In South India, around the cities and on the larger plantations, the conditions are relatively good. In the North and the North-East, many tea pickers still live and work in miserable conditions.
The workers in the Indian tea sector are highly organised. There may, however, be strong rivalry between the various unions on the tea plantations, and the labour unrest thus caused is usually to the disadvantage of the workers and to the benefit of the management. The 'elected' union leaders do not always present the interests of the group of men and women working on the plantations. The plantation workers belong to the lowest socio-economic group and have many women and Adivasi (indigenous people) among them. The union leaders are often 'outsiders' from the middle class. Besides being indifferent, some of them are even prejudiced against women, indigenous people and unskilled labour.
Although tea is traditionally a plantation product, in many countries it is also cultivated by small-scale producers. In Sri Lanka, for instance, more than half the tea crop is produced by small farmers, and in Nilgiris (the biggest tea area of South India) small-scale production predominates. About 60% of Kenyan tea comes from small farmers. (See panel) The cultivation of tea is attractive to small farmers because tea provides work and income throughout the year, it requires relatively little investment, and the risk of complete crop failure is small.
Small farmers may sell their crop to middlemen, to plantations or to 'bought leaf factories' - factories which buy up green tea, process it and sell it. Prices paid for green tea are usually low. Tea supplied by small farmers has a sometimes justified reputation of being inferior to the plantation product which depresses the price paid to them even further. Small farmers are said to lack the necessary knowledge of how to pick and store the leaves and of how to treat the bushes and the soil. Poor transport means that it often takes too long for the tea to arrive at the processing plant. Besides, small farmers may lack the resources to afford necessary technical inputs such as irrigation and fertiliser.
Tea has long been included in the product range of the European fair trade organisations. The European Fair Trade Association (EFTA) member organisations import tea from seventeen partners in Asia and Africa, who are, for the most part, private companies. They include Stassen in Sri Lanka, and small farmers in Kenya and Zimbabwe.
Since 1994, fairly traded tea has carried one of two different fair trade marks. The registers for the marks have recently merged and common criteria have been agreed.
The TransFair label is currently applied to teas in Germany, Luxembourg, Austria, and Japan; whereas the Fairtrade Mark can be found on products on the British market. Neither of the fair trade marks restrict themselves to purchases from small farmers. In fact, the producer registers include large plantations which have to satisfy at least the local legal criteria for working conditions such as minimum wage, housing and health care. Neither of the labelling initiatives has established a minimum price. Instead, a premium price is paid on top of the market price (which must cover at least the costs of production). These premiums go into a fund for the benefit of the workers. A consultative body, in which both the workers and the management are represented, decides on the use of the money. In this set-up, the relationship between workers and management is of vital importance.
There are signs that the market for organic teas is growing and fair trade organisations are pioneering work to develop environmentally-sensitive production and cultivation methods. This benefits not only the consumer but also the producer. For the plantation worker or farmer, health protection is particularly important, and on a long term basis organic cultivation also helps to increase soil fertility. Several organic tea suppliers appear on the TransFair register.
The situation of many tea producers is harrowing, large numbers of them being underprivileged workers and farmers. It is these most disadvantaged producers who would benefit most from fair trade relationships.
On tea plantations, involving millions of workers world-wide, working conditions often leave much to be desired. Fair trading with plantations where the workers are paid and treated well can contribute significantly to the elimination of structural poverty.
Of course, fair trading with small tea producers continues to be an important option as it offers the best opportunities for the empowerment of tea producers. One obvious problem is that small farmers have to sell to privately owned factories unless they are fortunate enough to belong to the small number of co-operatives which have their own factory. Ownership of a factory is rare because it requires considerable investment.
There remains the problem that the quality of tea from small farmers is considered to be below export standards. In both Africa and Asia, there are cases of small farmers who have organised themselves to deal with the quality problems. A well known example is the semi-governmental small farmers' organisation, the "Kenyan Tea Development Authority", which has become the world's biggest single exporter of tea.
In the Netherlands, Fair Trade Organisatie, the National India Working Group, and the labelling foundation Max Havelaar, are currently examining new possibilities for co-operation with small farmers (as is Traidcraft in the UK). Studies have shown that importing from small farmers' co-operatives in countries other than Kenya is possible. There are co-operative factories in South India, and farmers are also beginning to organise in Sri Lanka. A few obstacles are still to be surmounted, especially in the field of quality, but fair trade may provide just that bit of support for the co-operatives to develop into reliable trading partners who are able to supply good quality tea.
There are also some signs that at least part of the mainstream market is considering the ethical issues in purchasing tea, although from the perspective of improving quality rather than justice. Whether this will deliver real benefits or whether it is just a public relations exercise remains to be seen.
The price of tea is largely determined by supply and demand. But large tea corporations such as Brooke-Bond Lipton Ltd (Unilever), Lyons Tetley and Premier Brands have a considerable influence on supply and demand and thus on the price-fixing process.
Market concentration is extremely high. 90% of Western trade is in the hands of seven transnational companies and 85% of world production is sold by transnationals. Their market power is a major determinant at tea auctions. With their buying policy, these corporations strongly influence both price movements and the demand for certain qualities of tea. Their ownership of both plantations and processing factories is called horizontal integration, but there is vertical integration as well, in that they also control transport companies, shipping agencies and so on. This concentration of power, with corporations sometimes controlling the entire production process from tea shrub to tea bag, offers ample scope for manipulation.
In the mid-1980s, the former Soviet Union bought up large quantities of tea from India at a time when internal consumption in India was also increasing. This increased demand caused a sharp rise in the price of Indian tea.
The multinational corporations decided they would bring down the high price by temporarily refraining from buying Indian tea. In order to maintain local supplies, the Indian government made two separate attempts to control the market by imposing export restrictions. It also set a minimum export price in an effort to keep prices at a profitable level.
The large tea corporations then decided to with-draw collectively from the Indian market, with the result that nothing could be exported at all.
In the end, the Indian government had no choice but to lift the measures again.
Transnational corporations can afford such actions thanks to their high degree of flexibility, their buffer stocks and their speculative transactions. The flexibility of the companies is enhanced by deliberately reducing differences in quality. With the exception of a few quality-conscious consumer countries, a constant degeneration and adaptation of tea qualities is going on all over the world. Many tea qualities have become interchangeable and are bought where they are cheapest.
Tea production in Africa, and in Kenya in particular, has been expanding rapidly since the 1960s. The Kenyan Tea Development Authority ( KTDA ), established in 1962 by the British Commonwealth Development Corporation, has been at the forefront of these developments.
Primarily a parastatal marketing organisation, KTDA aims to promote tea produced by small holders to the export market.
It has been remarkably successful with over 250,000 smallholders participating in the scheme. Production is currently over 200,000 tonnes per year from 44 factories, making KTDA the largest tea exporter in the world. The growth is set to continue as four new factories are under development each with production capacity of 5,000 tonnes per year.
KTDA has been successful because it has focused on quality in growing, plucking and production, thus consistently producing high value teas which are widely regarded as being superior to the Kenyan plantation sector.
KTDA has overcome many of the problems often associated with smallholder tea production. By maintaining a strong focus on quality through technical advice, provision of fertilisers and a greenleaf collection system, it has ensured a ready market and comparatively high prices for the tea.
Farmers benefit not only from higher prices but, because they are encouraged to own shares, the small holders have a degree of ownership of the factories. Furthermore, they also have a degree of control in the factories. Through a network of committees, the farmers elect the majority of the Board of Directors including the Chairman. This ensures that more of the value from the production process, from green leaf to finished product, passes back to the farmer in the form of a 'Second payment'. This is an annual lump-sum profit-share calculated on the basis of the price obtained at auction for the tea. Since the auction price depends on quality this is a built in incentive to increase standards.
Although often described as a success story KTDA is not without its critics. Because the value of the second payment is linked to the auction, it fluctuates considerably year on year and between factories. This makes it difficult for farmers to plan, especially as the second payment is often used for major items of expenditure such as school fees.
The very success of KDTA has lead to a huge increase in quantity of Kenyan tea which has led to a corresponding fall in price. Production more than doubled in the 10 years 1985 to 1995 while prices have dropped 15 % in the last 2 years. The fluctuating price is outside the control of KTDA and is a reflection of supply and demand rather than maladministration.
In fair trade, prices paid for tea should at least cover the costs of production and provide for an extra margin for the improvement of working and living conditions and for future investments. These might include conversion to organic cultivation and education and training for small farmers. ò Advance payment
Advance payment prevents producers from falling into debt before they see their harvest. At the producer's request, part of the product value can be paid in the form of an advance payment. Small growers can use this money, for example, to improve the productivity of their land and therefore the quality of the tea.
Producers are very vulnerable to the erratic movements of the international tea market. Fair trade organisations, in principle, maintain trade relationships on a long-term basis which gives producers security. This allows them to plan social development projects or achieve long term goals such as the transition to organic cultivation. ò Packing
Fair trade organisations prefer tea to be packed in the producer countries. In this way, producers receive the added value and new jobs are created. This step is particularly important for them. They wish to be more than the mere suppliers of a commodity which is usually refined, blended and packed in the industrialised countries.
The UK is the second largest importer of tea after the Russian Federation. In 1995 the UK imported 136,000 tonnes (13% of total world exports). This is more tea than the rest of Europe put together.
Any changes in the UK market will therefore have a direct impact on producers - and this traditionally staid market is currently undergoing considerable change.
Demand for tea is slowly but steadily falling as customers switch to coffee and, especially, to soft drinks. Nevertheless tea is still the number one British drink and the market leaders are fighting hard to maintain market share and stimulate demand. The innovations and tactics used do not, however, benefit the producers.
In order to increase value, the emphasis is increasingly on premium priced, top quality products. This has increased the value of tea sold despite a fall in volume. While this means higher prices for those factories able to meet the higher standards, it results in a more difficult time for low quality producers who are already suffering from lower prices. They are also powerless to do anything about it as quality is largely determined by climate and altitude.
Along with the higher quality product comes an emphasis on more sophisticated packaging. The emphasis is on image and freshness, with foil wrapping and higher quality printed boxes becoming the norm. This is compounded by gimmicks such as round or even pyramid shaped tea bags. While this may seem a long way from the farmer it is not irrelevant. The increasingly sophisticated and expensive packaging puts downward pressure on the cost of the tea itself and makes adding value in the country of origin much more difficult. Meanwhile an even higher percentage of the retail value of the finished product goes to the marketing company and not to the farmer.
Product innovation is also a key feature of the current UK market as the brand leaders compete to maintain their market position. Although currently commanding only a small share of the market, a number of sectors are growing rapidly. Instant, Iced, Decaffeinated, and Flavoured teas are all growing, supported by massive advertising budgets. Again, the advanced technology required in the manufacture is unavailable to producing countries and further alienates the farmer from the market.
However, the emphasis on quality has not been all bad news for producers. As part of a quality improvement programme, one major UK brand, Premier, has included a consideration of social and ethical issues in its purchasing criteria and is working closely with the Fairtrade Foundation. Whether this will have any influence on the rest of the tea industry or on the lives of tea workers remains to be seen.
