conformity to quality standards in international tea markets the case of south indian tea marianne...
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Conformity to Quality Standards in International Tea MarketsThe Case of South Indian tea
Marianne Nylandsted Larsen
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
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
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
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
Department of Geography & Geology
Production of tea in South India
Production of tea in South India, CTC and Orthodox, 1961-2006
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50
100
150
200
250
Year
Mil
lio
n k
g
CTC
Orthodox
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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)
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
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
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
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
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
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
Department of Geography & Geology
Unit export prices (selected countries), 2006
Unit export prices (Rs per kg), 2006
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Russ
ia
Kaza
khst
an
Ukra
ine
Uzbe
kist
an
Oth
er C
IS
Unite
d Ki
ngdo
m
Neth
erla
nds
Ger
man
y
Irela
nd
Pola
nd
USA
Cana
da UAE
Iran
Iraq
Saud
i Ara
bia AR
E
Turk
ey
Afgh
anis
tan
Sing
apor
e
Sri L
anka
Keny
a
Japa
n
Paki
stan
Aust
ralia
Oth
er c
ount
ries
Countries
Rs p
er k
g
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Export of Tea, 2006
Export of tea from India (million kg), 2006
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5
10
15
20
25
30
35
40
45
Rus
sia
Kaz
akhs
tan
Ukr
aine
Uzb
ekis
tan
Oth
er C
IS
Uni
ted
Kin
gdom
Net
herla
nds
Ger
man
y
Irela
nd
Pol
and
US
A
Can
ada
UA
E
Iran
Iraq
Sau
di A
rabi
a
AR
E
Turk
ey
Afg
hani
stan
Sin
gapo
re
Sri
Lank
a
Ken
ya
Japa
n
Pak
ista
n
Aus
tralia
Oth
er c
ount
ries
Countries
Mill
ion
kg
Department of Geography & Geology
Department of Geography & Geology
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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)
Department of Geography & Geology
Auction prices, 1995-2006
Auction prices (US cents/kg), 1995-2006
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150
200
250
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
US c
ents
/kg
South India
North India
Sri Lanka
Kenya
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Department of Geography & Geology
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
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.
‘
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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
Department of Geography & Geology
Exporting countries
Major tea exporting countries
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350
400
2000 2001 2002 2003 2004 2005 2006
Year
Mil
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g
Sri Lanka
Kenya
China
India
Vietnam
Indonesia
Argentina
Malawi
Tanzania
Zimbabwe
Others
Department of Geography & Geology
Import – major regions
Import of tea (regions)
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1000
1500
2000
2500
2000 2001 2002 2003 2004 2005
Year
Mil
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g
EU
Other West Europe
East Europe
America
West Asia
Asia other than West
North Africa
Africa other than North
Oceania
Department of Geography & Geology
CTC and Orthodox tea – average unit prices
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20
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60
2001 2002 2003 2004 2005 2006
Year
Rs/
kg CTC
Orthodox
Department of Geography & Geology
Intra-seasonal variation in prices
Green leaf prices (BLF)
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Jan Feb March April May June July Aug Sept Oct Nov Dec
Months
Rs
per
kg
Standard leaf
Fine leaf
Department of Geography & Geology
Total quantity sold at auctions and total production (million kgs) in South India, 1991-2006
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Year
Mill
ion
kg
s
Cochin
Coonoor
Coimbatore
Total quantity sold atauctions
Total production, South India