TEA INDUSTRY: NEED FOR GREATER SYNERGY BETWEEN CORPORATE AND SMALL PRODUCERS

By V. Ramaswamy, Financial Times Information, May 31, 2005

PRICES for Indian tea at the six auction centres have shown that they have improved in 2004, but are still much below the prices achieved in the late 1990s. Consider the figures shown in the Tables. Indian prices have bounced back to Rs 65.50, 16.4% over 2003. But in the case of our neighbour and competitor, Sri Lanka, the increase has been to the extent of 21.5%. This is attributable to the emphasis on quality at the harvest and manufacturing stages in Sri Lanka and their aggressive promotion, especially in Europe and West Asia. Besides, Sri Lanka produces 90% orthodox tea and most of the importing countries pay a premium for this type of tea except for U.K. and Pakistan, who favour C.T.C. tea sourced from Kenya.

In India there was a significant switch to C.T.C. in the 1960s and 1970s to cater to the burgeoning domestic market. A change that no doubt paid dividends. But the growth in the domestic market has not been sustained in the last decade and this will have to be addressed. There is enormous potential to promote tea consumption in Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Andhra Pradesh, where the per capita consumption of tea is lower than in the other parts of India.

A study of the figures shown in Table 4 shows that orthodox tea has shown a higher increase in prices during 2004 than C.T.C. tea. This trend is likely to continue. The Indian production of orthodox tea has been hovering around 90 million kgs per annum. There is no reason why this cannot be stepped up to 150 million kgs, as many of the well-organised corporate producers have the manufacturing capacity to effect the switch. It is a well-known fact that orthodox tea yields at least 30% less cuppage (cups of tea per kg) than C.T.C and so such a switch will strengthen the overall market.

Small Grower Sector

There is a feeling that the fairly large quantity of common or plainer tea produced in the small grower sector, that sends its green leaf to bought-leaf factories for processing, brings down the sentiment of the market. In South India, the bought-leaf factories produce approximately 75 million kgs of tea, while the North East produces around 70-100 million kgs. No doubt, there is an urgent need to help the small growers to not only improve their plucking standards, but also handle the plucked leaf in a proper manner and transport it to the factories in as fresh a condition as possible. The corporate producers will have to guide them in this respect for the survival of the tea industry. In other words, a synergy between corporates and small growers is very much required.

There is a lesson to be learnt from Sri Lanka in this respect. Of the 1,81,000 hectares under tea in Sri Lanka, 42 per cent is owned and managed by small growers, who account for 62% of the country's production. In other words, the productivity of the small grower sector is much higher at 2,216 kgs of made tea per hectare compared to 1,151 kgs per hectare in the corporate sector.

What is even more surprising is that the quality of the end product is as good as it is in the corporate sector because of the strict control on the standard of leaf, advisory visits by the factory personnel and a regular dialogue between the factories and growers. A similar situation prevails in Kenya, where the tea produced by the Kenya Tea Development Authority (tea from small growers) often outsells the tea by the corporate sector. In the case of India, such discipline has to be brought about by a joint effort.

Corporate Sector

In India and Sri Lanka, the cost of tea production is much higher than in other producing countries because of the higher labour wages and social costs. The higher living standards of workers at home will have to be matched by high productivity. There is no other alternative but to devise better methods of plucking (a labour-intensive operation). Research and development efforts will have to be focussed in this area.

Those in the tea industry are aware of the recent change in the structure of a large tea company in South India, where the lease-hold rights of more than a dozen estates was transferred to a new company formed by all levels of employees including the managerial staff (employee buy-out model), with the possible intention of reducing overhead costs and shift to an owner/manager model.

The result will be known in three to five years, and this will prove to be a case study for the future. If successful, it could turn out to be a trend for others to follow.

In the corporate sector, consolidation of holdings is required so that individual profit centres can aim at economies of scale in the manufacturing process. In the field, it is basically an agricultural operation, which can be carried out by workmen with basic skills.

'De-corporatisation' is an option. But at the manufacturing stage, the industry will have to think of setting up mega factories of 5 million kgs of made tea capacity, which will justify the employment of proficient managers and specialists. Such factories will ensure the production of a standardised product through the year and marketing also will become more orderly and efficient.

Government interference on the pretext of monitoring, ensuring free play of market forces, pre-empting collusion between buyers and so on, should be removed and the producers should fine-tune their marketing, firstly the auction system. After all, the leading auction companies have provided dedicated service for nearly a century and a half and have the potential to continue or upgrade this service with their teams of competent tasters, auctioneers and consultants.

The Indian tea industry has weathered the worst economic situation over the last 5 years. But a concerted effort is now required to harness the talent and skills available within the industry and adopt a totally innovative approach.

(The author, a former Director of Carritt Moran & Co (P) Ltd, Kolkata, is a Tea Plantation Valuer and Consultant based in Coonoor. Feedback may be sent to vramsam2002@sancharnet.in)