India’s tea production, with gains buoyed almost entirely by small growers, is likely to set yet another record estimated at 1,380 million kilograms when the final tally for December is announced. Record harvests are the new norm, but more telling is who consumes this tea, how it is traded and how efforts to improve quality are changing the traditional output of black CTC (crush, tear, curl).
The Tea Board of India once again ordered closed the nation’s tea factories from mid-December through February. The ban on tea processing, first instituted in 2018, has two objectives. The first is to prevent factories from processing tea leaves from branches pruned at year-end. Unscrupulous harvesters in the past delivered coarse leaves from pruning to bought leaf factories eager to continue operations year-round. The second objective is to provide tea trees a welcome break from the stressful plucking cycle. A period of dormancy during the winter months ensures a better spring flush, which generally results in higher prices.
Changing Harvest Patterns
During the past 15 years, India’s tea production has increased by 52% from 878 million kilograms in 2003 to nearly 1,400 million kilograms. Instead of historical gains at large, well-financed and carefully managed plantations, many with self-contained factories, virtually all this increase is the result of small growers harvesting tea on 10 hectares or less.
“Production has outstripped domestic consumption of the beverage and has led to stagnancy in the market. As a result, there is a mismatch between the cost of production and the average price realization, much to the concern of the industry,” according to R.P. Thapliyal, the chairman of the north Bengal branch of the Tea Association of India (TAI).
This year a strong November “autumnal” harvest in the north of India added to spring gains resulting in a 3% increase through November, according to Rajesh Gupta, compiler of Global Tea Digest.
The Business Line reported annual totals were depressed by bad weather in Tamil Nadu and Kerala. Assam remains the nation’s top region at 1121 million kilograms.
Export Earnings Rise
Russia and the adjacent CIS bloc of countries that formerly comprised the Soviet Union have for a generation been India’s most important tea trading partner. Russia is the world’s top tea importer and Pakistan, the second-largest importer, is no longer the primary destination for Indian tea. Instead shipments to Iran, for the first time, will exceed Russia.
Exports to Iran surged by 115% to 48,237 tons during the first months of 2018 while Russia purchased 11.5% less tea, importing only 45,988 metric tons. Earnings contracted to $97.8 million.
“While Russia has historically been the biggest importer of Indian tea – typically accounting for 25% to 30% of all Indian tea exports – so far this year it has tallied a 22.85% share, versus 23.97% for Iran,” according to the International Business Times.
Better quality tea has resulted in better prices and increased demand. Last year through November exports averaged $2.93 (INR207) per kilogram. In 2019 the average increased by INR19.76 ($0.28), a gain of 9.56%. Higher prices led to decreased volumes (down 1.58%) but India clearly benefitted as earnings increased 7.83% to $7.3 million (INR5159 crore), an increase of $530,000.
Export volume was 231.36 million kilograms through November 2019.
Iran, one of the world’s top tea-consuming nations, prior to U.S. sanctions was a reliable export market but never India’s primary buyer until this year. The decline in demand due to Russia’s economic malaise is the primary driver but the near war with Pakistan led India to virtually cease trade. Tea exports were down by half in a market that is worth $560 million.
“Pakistani [tea] buyers usually don’t falter on payments,” an Indian tea exporter told International Business Times. “Our trade relations with them were good until recently. But the [February 2019] Pulwama attack hit exports. And now, the situation has worsened. We are unsure if payments would come if we sent them consignment.”
Following the attack, India raised import tariffs on all Pakistani goods to 200%. Pakistan kept its import duty on Indian tea at 11% but 80% of the tea purchased this year was from Kenya.
Further complicating matters are U.S. sanctions on Iran that discouraged Sri Lanka and many African countries from trading directly with Tehran. To assure its citizens get their tea, India and Iran devised a “trade for oil” scheme in which rupees are substituted for dollars. It’s convoluted but essentially India pays Iran for oil in rupees and gets credit for the 228,677 metric tons of tea shipped during the first 10 months of the year.
Domestic Consumption Lags
India is the second-largest consumer of tea globally. Tea lovers drink one billion kilograms annually, yet per capita consumption is only 786 grams (27th globally). Unlocking the domestic market holds great potential.
During the past two decades demand has ‘expanded significantly’ in most tea producing countries in Asia, Africa and Latin America, while consumption in Europe (except Germany) is down, according to the UN Food and Agriculture Organization (FAO). This is due in large part to conveying a message of health and wellness, rather than positioning tea as the cheapest beverage to be bought.
India lags far behind China which accounts for 38.6% of world tea consumption with annual growth rates averaging 10% for the past 30 years. Chinese tea drinkers consumed 2.1 million metric tons of 5.2 million metric tons of tea produced in 2016. In contrast, India consumed 19% of the world’s tea that year, according to FAO.
Local markets are the biggest sales channel, but sales of packet tea are growing with packaged tea the preferred format for 80% of India’s urban dwellers and 75% of rural households, according to The Hindu Business Line. Currently about half of sales are from packaged tea.
An incremental increase to 800 grams per capita would dramatically boost sales. It is instructive to note that in the U.S. tea brands spend $3 million annually. Advertising expenditures in 2018 were $109 million for the bottled water industry, while the beer industry spent more than $1.5 billion, and the soft drink industry came close to $1 billion, according to data from Kantar Media.
DP Maheshwari, managing director, Jay Shree Tea estimates it would require $15,000-$30,000 (INR10-20 crore) per year to advertise and market individual brands in India.