An In-Depth, Economic Review of Tea Production
By John Smith, HPT – Henry P. Thomson, Inc.
There is much discussion in certain corners of the tea trade, the media and within governmental bodies about the low-price level paid to tea farmers when compared to the final sales price on supermarket shelves in consuming countries. The end result of these discussions tends to be head shaking, clucking of tongues and a thorough condemnation of the unscrupulous middle men that suck all the value out of the supply chain.
The purpose of this article is not to engage in an audit trail of every cent spent over the tea value chain. Nor is it an attempt to justify the entire premium realized by large multi-national marketing behemoths when compared to the price paid to small holders, who farm the leaf that becomes the beverage we all enjoy so much. Rather, it is an attempt to lay out a few of the steps in the long process that gets that leaf from the bush into the cup and review in general terms what economic impact those steps have on the product we consume. While there may indeed be some unjust price differentiation, the degree of the imbalance may not be as large as one is initially inclined to think.
First, let’s look at the “small holder.” We tend to think of these individuals as brave tillers of the soil, tirelessly performing their solitary work in the fields to harvest the green gold that will later become our beverage of choice. There are such individuals. In many cases, however, the owner of the field pays a plucker to gather the leaf on his behalf for delivery to the factory. It seems reasonable that the person employed to harvest the leaf should be entitled to a wage for the service rendered.
As an aside, when considered on a global basis, there is a huge oversupply of green leaf relative to demand for the final product. On a more local level, in many origin countries there is a similar imbalance between the amount of green leaf produced and the facilities available to dry the leaf. This production imbalance is encouraged by many well-meaning (but misguided) governmental officials who dream up newer and better means for the small holders to increase their yields hoping for greater economic self-sufficiency. A rudimentary understanding of supply and demand suggests that more material provided to an indifferent marketplace will result in lower prices. But that is a topic for a different article.
There are businesses that specialize in gathering plucking crews and arranging for higher volume deliveries to factories. This consolidation of product leads to a larger number of potential buyers for the leaf, and higher volumes of green leaf consumption by increasing the potential efficiency for the driers. Again, it seems reasonable that these entities be compensated for their service.
At this point, we have a markup over the initial price paid on the leaf for necessary value added services and we have not even left the village where the tea has been grown! After all, while still on the plant, the leaf has merely theoretical value. It is still not in a form that we can enjoy.
The next step in the process is the factory where the tea is dried. If we were to attempt to export raw tea leaves, the result in our cups would be disastrous. Someone needs to convert the green leaf raw material into the dried product we are able to brew and enjoy.
This state change is a large contributor to the price differentiation we see in the marketplace. After all, there is not a 1 to 1 input to output ratio in a tea factory. We are desiccating the tea leaf – drying it to a three-percent moisture content. As a result, it takes roughly five pounds of raw leaf to make one pound of dried tea. That being the case, it stands to reason that one pound of the dried tea leaf should cost five times as much as the green leaf used to make it.
- Plus, the labor to harvest it.
- And deliver it to the factory.
- And the wages for the factory workers.
- And the energy required to dry the leaf.
- And the labor to sort the leaf into components each specific buyer might require.
- And the packing materials required for shipment.
- And the certification the factory requires to manufacture a foodstuff.
- And any other premium required to show how socially aware the manufacturer may be.
We now have a product costing several times the initial price paid for the raw materials and have not even left the factory floor. But what could come next?
The export agent will perform the following duties.
- Transportation from factory to port
- Consolidation into suitable export quantities
- Expenses to identify a suitable buyer for the product
- Export costs
- Shipping costs from origin country to consuming country
The importer will manage the next few steps.
- Import costs
- Warehousing and storage at destination
- Quality control and testing
- Sales expenses
- Delivery to packer
Our tea has finally arrived at a location where it can be converted into a format suitable for retail consumption! The Packing Company will transform bulk packages into 2.3 grams teabags for our use. That entity must cover the following:
- Packing expenses
- Advertising and sales
- Delivery to retail location
Let’s review how the supply chain looks:
From the owner of the tea plant, the harvester, transport to factory, the factory, transport to port, the exporter, the shipping company, the importer, more transport, the packer, the retailer to the consumer. Eleven steps from bush to cup.
There are those who would argue that this long chain is not necessary – there are too many chefs in this kitchen. Well, let’s review.
Can we export raw leaf? Not really. It has to be dried to make the beverage we like.
Can the farmer dry his own tea? Set up a website and sell direct? Pack, ship, and fulfill orders? Certainly! He can divide his time between growing the raw material, tending the plants, harvesting the leaf, processing the leaf, packing the tea, handling shipping and logistics. If the farmer works extremely efficiently, they can stay on top of all these steps. They might even be able to register with the health authorities in consuming countries, track the different product requirements from each customer. In their spare time, they can handle all the SEO and marketing work required to sell their product. Working off the laptop in the living room over the high-speed Internet access available in the tea fields. Or not.
Our intrepid smallholder can harvest 120 pounds of green leaf per eight-hour day – enough to manufacture 24 pounds of tea. He has not dried it yet or shaped it or packed it or anything else. Let’s give him another 12-hour shift to get that little bit out of the way – four hours to sleep and he can get right back at it tomorrow! Or, he can specialize in a portion of the job, realize that economies of scale are real and do confer benefits, and concede that possibly one or two of the additional supply chain participants are worthy of their hire.
Then there is the little matter of market knowledge and product placement. One customer might demand the first flush, pure bud, most exclusive share of the production. But will that same buyer express any interest in rainy season teas? Back to the first flush, after we have separated out the bud and the longer leaf grades, we will still have smaller, broken grades that appear. Does the producer throw them away, or do they look for additional buyers to consume this portion of their production. Trained, experienced agents work on both sides of the equation to facilitate this type of market clearing activity – ensuring that the quantity of tea produced eventually finds a home.
We can all refer to Plato’s Republic for a defense of specialization, Adam Smith and his ideas on Division of Labor, or David Ricardo’s theory of Competitive Advantage to review the benefits that derive from exchange of labor, or cooperation. While we can disagree over which participant in the chain should be entitled to what degree of compensation, I hope that we can all see that the duties performed by each link are in fact of some utility and contribute in some real way to the common good.
At this point, we could also think a bit about economic order quantities and in what way larger shipment and handling volumes can result in huge reductions in logistics expenditures. As an example, I can pay to ship a 10-pound package from origin and legally import the goods for approximately US$200, resulting in a final cost of US$20 per pound. If I ship a full 40’ shipping container of the same product from the same origin, I have landed costs of US$0.12 pound. Shipment size matters. Logistics matters. Getting something from one place to another is never free. Crossing international borders and covering thousands of miles of difficult terrain and hazardous oceans has a real cost associated with it. In conclusion, while it is possible for an individual producer to grow, process, sell, ship and distribute their product, it is not likely. It certainly cannot happen in large enough volumes at a reasonable price point to keep a functioning global marketplace that can consume all the green leaf produced on an annual basis. For that to happen, we need many individuals with specialized knowledge and ability – all of whom will add their associated expenses to the final product cost.
John Smith graduated from Georgetown University in 1989 with a degree in Languages and Political Science, and he received his MBA in Finance from Fairleigh Dickinson University in 2000. He interned for agricultural raw material processing firms in Argentina and Brazil, and, in 1989, he worked with Harrison Trading Co. Inc. in supply/sales of nutraceutical raw materials. He joined HPT in 1992 and was appointed Vice President in 1995. He shares operational duties at HPT with Eugene Amici, president, including purchasing, sales, finance and managerial functions. Smith also served the Tea Association of the USA on its Board of Directors. To learn more, visit http://www.hpthomson.com.