1. Background and key issues
Although China and India are the leading global tea producers, Kenya is the third largest tea producer and the largest producer of black tea. Kenya also plays a leading role in auctioning East African tea, although it is facing a growing challenge from the Dubai Tea Trading Centre (DTTC).
With growth in tea production slowing more quickly than the (also slowing) rate of growth in consumption, tea prices are projected to remain relatively high. Tea prices remained strong in 2012 until November, but then fell by 12.8% to February 2013. This downward trend has continued.
In 2012, Kenyan smallholder tea producers enjoyed good returns for the third year in succession. However, concerns are now being expressed over prospects for short-term earnings, which need to be considered in the context of rising production costs. In the longer term, it is thought that processes of climate change will pose a threat to tea production. Drought conditions have already affected rehabilitation efforts in countries such as Tanzania, and a major geographical shift in production areas is likely to be required in Kenya. It is likely that ‘aid for trade’ support could play an important role in assisting with climate-change-related adjustments.
While duty-free access to the EU market is enjoyed, there is growing concern related to non-tariff measures, including moves toward environmental (sustainability certification), social and ethical standards. This is particularly the case where meeting these standards increases producer costs without a commensurate improvement in producer returns.
A key challenge remains: to identify ways in which ACP producers can move up the value chain, through improved packaging, branding, and product differentiation. Defining the role that the traditional corporate players who dominate the tea trade should play in local value-added processing and market diversification initiatives is a critical challenge for ACP producers, processors and policy makers.
ACP producers will need to stay on top of the changing culture of tea consumption by developing value-added processing and market diversification strategies. They will also need to respond to moves toward sustainability certification and the strong growth in demand for fair-trade and organic tea.
Progress continued to be made in 2012 regarding ACP market diversification for tea exports and product differentiation, through the development of the Kenya Tea Mark of Origin initiative. Market diversification initiatives include promotional activities on national and regional markets.
Past market experience suggests that, within the ACP region, a focus on increasing the quality of production, rather than simply expanding production, is likely to offer the best return to ACP producers, in view of evolving market trends. This involves focusing on meeting and staying ahead of evolving standards in order to maximise access to price premiums. This could form part of wider efforts to deal with rising input costs.
Four major policy issues were identified in the Agritrade 2012 Executive brief on tea (see Agritrade Executive brief ‘ Tea sector’, 11 November 2012):
- getting to grips with production-related challenges;
- staying on top of evolving consumption trends, including meeting the growing demand for organic teas;
- mobilising resources to meet the challenge of climate change in the tea sector;
- dealing with rising input costs.
2. Latest developments
2.1 Global tea market developments
Tea production and export trends in 2012–13
World tea production rose by 3.1% between 2010 and 2011, after having increased by 5.7% between 2009 and 2010, according to the East African Tea Trade Association (EATTA). While final data is not yet available for 2012, lower production is expected across major tea-growing countries such as Kenya, Sri Lanka and Malawi because of unfavourable weather conditions.
In China, tea production reached 1.8 million tonnes in 2012, up by 11.2%, but in India it dropped to 514.99 million kg in 2012, compared to 542.16 million kg the previous year. Low rainfall in the main tea-producing area of India could further affect production in 2013, the market effects of which might be compounded by limited carry-over stocks in India. Production in Sri Lanka, meanwhile, is largely stable, having fallen marginally from peak levels in 2010.
Kenya, the world’s biggest exporter of black tea, produced 369 million kg of tea in 2012, a drop from 377 million kg in 2011 and 399 million kg in 2010. This led to high prices which, together with good weather, stimulated production. The Tea Board foresees a sharp rise in 2013 production, to 410–415 million kg of tea. Together with weaker demand, it is considered that this has contributed to price falls at auctions during the first half of 2013 (see Agritrade article ‘ Tea market price falls raises supply chain issues in Kenya’, 19 August 2013).
There was a continued decline in Sri Lankan tea exports in 2012 (−2.5% since 2010),while Indian exports remained stable. Despite the scale of its production, China plays a relatively marginal role in exports. On the demand side, political upheavals in the Middle East and North Africa have served to reduce exports to countries in these regions, but with increasing exports to Iran, Russia and the countries of the Commonwealth of Independent States (CIS). India in particular has benefited from recent increased tea exports to Iran, as Iran seeks to rebuild stocks after previous trade disruptions linked to US-imposed financial sanctions. This has provided Indian exporters with some relief, despite the much more competitive position of Kenyan tea exporters on world markets. Developments in trade with Iran have played an important role in tea trade developments in 2012–13.
Tea imports into Russia fell by 5% in 2012 (from 186,000 tonnes in 2011 to 177,000 tonnes), reflecting a high level of market saturation. Black tea accounts for 92% of Russian imports, making Russia potentially an important market for Kenya. Currently, 33% of Russian tea is sourced from Sri Lanka, 26% from India and 12% from China.
Tea price developments
Tea prices – which are set on the major national auctions of Mombasa in Kenya, Colombo in Sri Lanka and Calcutta in India – have risen over the last 5 years following the commodities boom, driven by higher demand in emerging markets such as China and India. They continued to hold up well in 2012 on the various auctions around the world but dropped in the first half of 2013.
Table 1: Mombasa auction average prices per tea exporting country (US$/kg)
|Total average price||2.54||2.72||2.88|
Source: East African Tea Trade Association
In 2012 in Mombasa, the average price of tea rose to US$3.18/kg from US$2.98/kg in 2011 and US$2.76 in 2010 (a 6.7% increase in 2011 and a 15.2% increase compared to 2010 prices). However, according to the EATTA, during the first 6 months of 2013 compared to the same period in 2012, Kenyan prices have declined by 7%, as production increased by about 20%. This has had an impact on other Eastern African tea producers as well as major world players like Sri Lanka and India.
In May 2013, the price of Burundian tea had fallen to US$2.32/kg from US$2.87 in May 2012 (−19%). However, according to the Tea Board of Kenya (TBK) prices are expected to rise in the second half of 2013. Overall Kenyan tea earnings for 2013 are expected to reach to KSh120 billion (US$1.40 billion), up from KSh112 billion in 2012. This is higher than the TBK’s January 2013 estimate of earnings at KSh116 billion.
2.2 Developments in ACP tea sectors
Developments in tea production in Kenya
Higher prices in 2012 boosted farmer income in Kenya and Eastern Africa as a whole. In September 2012, the Kenya Tea Development Agency (KTDA) announced “record earnings by smallholder farmers of KSh61.4 billion, a 12.5% rise from the last financial year”. This resulted in a payout to smallholder tea farmers of KSh45.3 billion, 12% higher than in the 2010/11 season and 19% higher than in 2009/10. Prices for green leaf tea rose to KSh50.1/kg in 2011/12 (+3.3%). According to KTDA, this ensured that Kenya’s small-scale tea farmers continued to be “the highest paid in the world” (see Agritrade article ‘ Kenyan smallholder tea farmers enjoy higher prices’, 18 November 2012).
Furthermore, growth in Kenya’s tea plantation sector has outperformed growth in the smallholder sector, with a 12% production rise by June 2012 compared to June 2011. Stronger earnings in 2012 stimulated investment in production and, according to the TBK, “quite a number of middle and large estates… [replaced] old tea bushes with new high yielding clones”, with these now driving up production.
However, challenges continue to be faced as a result of unpredictable exchange rates, decreasing farm sizes, high production costs and weather-related factors. Production costs have risen by 15% over the last year. Initiatives are in place to reduce energy costs, although programmes started in 2007 have not yet achieved their target of a 10% reduction in energy costs. While production costs account for 60% of the tea prices reached at the Mombasa tea auctions, at least 30% of this goes toward energy costs. It was estimated that reverting to hydro-energy would reduce energy costs to 12%, thereby substantially improving the producers’ profit margin. Current energy costs, which are denominated in US dollars, are highly dependent on volatile exchange rates.
Developments in tea trade in Kenya
Although auction prices have gone down 7% over the first 6 months of 2013, the overall tea export prices from Kenya have gone up by 4.9%, from an average price of US$2.45/lb in January–June 2012 to US$2.57/lb in January–June 2013. Approximately 30% of the total volume exported by Kenya does not go through the Mombasa auction. According to the EATTA, this tea is sold directly through negotiated long-term contracts (6 months to a year) and prices are set in advance.
Table 2: Kenyan tea exports
|January–May 2013||January–May 2012|
|United Arab Emirates||11,440,271||2,936,153,177||9,701,522||2,383,689,666|
Source: East African Tea Trade Association
One of the main preoccupations of Kenya and other East African tea-producing countries is the reliance on a handful of markets, four of which are unstable states (Egypt, Pakistan, Afghanistan and Sudan). Another is the UK which, facing an economic downturn, is searching for cheaper teas in response to consumer price concerns. Together with increased competition, this caused a decline in Kenyan tea exports to the UK of 14% between 2008 and 2012. However, a more positive factor in this decline is the success of efforts to directly access markets that were previously served via the UK (see Agritrade interview ‘ Kenya finding its market share in a demanding world tea market’, Mrs Sicily Kariuki, Managing Director of the TBK, 28 April 2013).
Table 3: Five-year Kenyan tea export registrations (kg)
|United Arab Emirates||17,154,735||12,782,620||22,157,877||22,604,275||23,844,201|
Source: East African Tea Trade Association
Kenya and other East African tea exporters, concerned about their overdependence on a limited number of markets, are placing a strong emphasis on market diversification, and looking at Kazakhstan, Ukraine, Poland and the Caucasian countries. Some success is being achieved in these markets, which have a traditional tea drinking culture. For example, since exports were initiated in 2003, Kenya has enjoyed double-digit growth in sales to the Ukraine.
Developing and increasing exports to other African markets (Nigeria, Niger, Ghana, Mali, etc.) is accorded high priority in East Africa. Although these are not traditional tea drinking markets, Kenyan market research shows that there is considerable market potential, and delegations are being sent to these potential new markets to identify customers. Indeed, African consumers might be considered a market with considerable potential for expanded tea consumption. There are, therefore, various programmes to develop domestic consumption of tea in Eastern Africa. This has included advertising campaigns, promotional events, and lobbying of the Kenyan government to reduce taxes on tea to make it more affordable to consumers. The option of diversifying into production of other teas, such as purple and green teas for export, is also being explored.
In April 2013, the TBK in partnership with Trademark East Africa launched a new online trading portal aimed at reducing bureaucratic delays in tea trading. The system provides for online services such as licensing, registration and enquiries.
In January 2013, India, Indonesia, Kenya, Malawi, Rwanda and Sri Lanka – which together account for more than 80% of black tea output – formed the International Tea Producers’ Forum. All of these tea producers face similar challenges such as labour shortages, climate change and a need to improve agricultural practices. The aim of the initiative is to promote and develop the commodity and ensure that its production is sustainable.
2.3 Developments in tea production elsewhere in the Eastern and Southern African region
In April 2013, Rwanda’s Ministry of Agriculture unveiled the second phase of its National Agriculture Export Development Board programme, ‘New tea plantations and factory construction approach 2012–2017’. The objective of the programme is to increase the area of tea plantations by 18,000 ha by 2017, building on the first phase of the programme in which 20,665 ha of tea were planted.
Also in April, the French aid agency (AFD) signed a €1.2-million programme to reinforce the trading capacity of the Burundian state tea agency, OTB. The aim of this programme is to improve quality standards along the whole supply chain, as well as to improve the marketing capacities of OTB, particularly its direct sales operations. In early 2013, with falling prices on the Mombasa auction affecting revenues, the OTB reduced the volume of tea it placed for sale through the Mombasa tea auction, in the expectation of a price recovery. This needs to be viewed against the background of a 3.6% increase in Burundian tea production between 2011 and 2012 (from 8,816 tonnes to 9,134 tonnes. A delegation of ministers from Mozambique went on a fact-finding mission to India in September 2012 to gauge the interest of Indian entrepreneurs in investing in the Mozambican tea sector. Key challenges identified in Mozambique were low productivity, quality issues and the need to increase local demand.
In Zimbabwe, the full potential of Makoni tea – which has alleged health benefits (similar to South Africa’s rooibos tea) linked to its high zinc content and caffeine-free attributes – has yet to be fully exploited through securing trademark or geographical indication (GI) protection.
While there are held to be huge potential benefits associated with GI protection for speciality teas, the recent rooibos experience in South Africa (following a French company’s attempts in February 2013 to register trademarks containing the words ‘rooibos’ and ‘South African rooibos’) is illustrative of the challenges faced in this area. In the South African case, it is unclear whether trademark protection or GI designation offers the most cost-effective form of product differentiation and intellectual property rights protection. Critically, the state of development of the national legal framework for trademark and GI protection is a major determinant of the relative costs and benefits of seeking trademark or GI protection (see Agritrade article ‘ Legal and regulatory constraints on GI protection illustrated’, 3 June 2013).
In Malawi, meanwhile, efforts are being made to create a tea auction floor, with the aim of maximising foreign exchange earnings. However, in 2012, less than 1% of teas sold at the Mombasa tea auction originated in Malawi, suggesting that issues related to the volume of trade handled could hold back the development of this initiative.
2.4 Trends in product differentiation in the tea sector in 2012–13
Most of the tea exported from Eastern Africa is in bulk form, and only 12% of Kenyan tea produced by the crush-tear-curl manufacturing method is in a value-added form. According to EATTA representatives, moving into value-added products in the long term requires a careful assessment of market dynamics, since it is not possible to compete head-to-head with companies such as Lipton, which buys Kenyan tea, packages it and distributes it across the globe under internationally recognised brands. Realistically, options for value-added teas “will probably be in the newer markets”, with there being “a need to develop a long-term strategy with support from the government” to exploit opportunities in this area.
In 2012, Tanzania’s production of value-added teas increased, following the opening of a new factory with a processing capacity of 1.5 million kg per annum. However, at present, this new investment is still only processing 4.2% of Tanzania’s national production (36 million kg per annum).
In terms of local market developments, in May 2012 Fairtrade Eastern Af was formally launched, explicitly to develop and promote Fairtrade-labelled sales in Eastern Africa. According to preliminary market research, out of a sample of consumers questioned, 86% of Kenyan consumers would look out for the Fairtrade mark when shopping, while 73% would be prepared to pay extra for a product with the Fairtrade label.
In Kenya, four new Fairtrade-labelled teas were launched: Iriani tea and three Kericho Gold speciality teas: green tea, English Breakfast and Earl Grey. This initiative is backed by the UK Department for International Development, which provides support to Fairtrade International through a £12m programme partnership arrangement.
Furthermore, Kenya’s leading coffee roaster and packer, Dormans, announced its plans to enter the tea market, with the launch of four brands, including one fair-trade brand. However, the chairman of the EATTA has expressed reservations about Fairtrade labelling of tea, stating that the “expensive fee imposed by Fairtrade” was “prohibitive for local brands that sought the mark”. He maintained that improved terms of access to Fairtrade labelling were required if more than a handful of companies were to benefit (see Agritrade article ‘ Tea market price falls raises supply chain issues in Kenya’, 19 August 2013).
2.5 Climate change and the tea sector
In Kenya, the most serious long-term challenge facing the tea sector is climate change. A workshop took place in Kenya in 2013 to assess the impact of climate change on tea production. Currently tea is grown in Eastern Africa under rain-fed conditions, but rainfall patterns have proved increasingly erratic over the past decade. Current tea-growing areas go through a regular 3-month drought period between December and March, and this can cause losses of between 14 and 30% in yields. Frost threats follow for another 3 months and hail can also cause green leaf loss. In addition, there are growing consumer concerns over ‘climate-friendly’ production processes.
In order to tackle these challenges, the International Trade Centre (ITC) has facilitated the creation of a public–private partnership involving KTDA, the Ethical Tea Partnership (ETP), Rainforest Alliance and FLO-CERT (the inspection and certification body for Fairtrade-labelled products), to train farmers and tea factory managers in both compliance with carbon emission standards and adaptation to climate change.
Furthermore, as the current major areas of production in Kenya become less suitable for tea production by 2020, with many areas unlikely to be tea-growing zones by 2050, it is critically important for Kenya to develop a new tea zone map. This accompanies initiatives to develop weather risk insurance products for the agricultural sector and to support farmers in engaging with climate-related restructuring processes (see Agritrade article ‘ Kenyan smallholder tea farmers enjoy higher prices’, 18 November 2012).
2.6 Rising competition from Dubai Tea Trading Centre
In the short term, rising competition from DTTC is of concern, with the volumes sold at the Mombasa auction declining steadily, from 348 million kg in 2010 to 320 million kg in 2012 (−8%). Conversely, between 2007 and 2011, United Arab Emirates (UAE) tea imports have risen by around 50% in value, from US$324 million in 2007 to US$485 million in 2011; the country’s share of total global tea imports has also grown from 8.3% in 2007 to 9.4% in 2011. Indeed, the UAE has now become the world’s number one re-exporter of tea, with 60% of the world market.
At present, Sri Lanka is the top supplier of tea to the UAE, providing around 20% of its 2010–11 imports, followed by India, with 8%.However, in April 2013 the Kenyan Export Promotion Council announced plans to open a tea warehouse in Dubai in 2014. This will ensure that Kenyan tea is always available at the Dubai auction centre and will potentially strengthen East African efforts to expand into non-traditional Asian and Eastern European countries.
3. Implications for the ACP
3.1 Scope for regional initiatives in supporting movement up the value chain
A critical challenge in the tea sector is how to use the emergence of new markets for tea to facilitate the transition to the production and marketing of value-added tea from East Africa. In terms of government support, the East African tea sector could potentially draw on the experience of the Caribbean rum programme that ran from 2002 to 2010.
Under the rum programme, the regional association of private sector rum producers, in close collaboration with national producers, elaborated a clear integrated strategy for the marketing and production of value-added quality branded and bottled rums. Other significant features included:
- close integration of marketing support with investment support;
- leadership by the private sector with support by the government;
- mobilisation of ‘aid for trade’ to provide core financing for the initiative.
A similar approach to market repositioning and product development could prove of considerable value in the East African tea sector. However, this will require:
- a strong regional association, with the network of relationships required to design a marketing and production adjustment strategy that meets the needs and aspirations of its member associations and production enterprises;
- the administrative capacity and accountable management structures to manage the subsequent regional programme and financing facility;
- government assistance to bring the parties together to design such a programme, and to mobilise the necessary ‘aid for trade’ support for its implementation.
3.2 Getting ahead of standards certification requirements
In addition to efforts to move up the value chain, there need to be joint regional initiatives to identify and stay ahead of evolving market trends. These include growing demand for organic tea and sustainability certification of tea production. Getting to grips with the costs involved in effectively meeting these certification requirements represents an ongoing challenge, with regional cooperation on the identification and dissemination of best practices potentially offering opportunities for cost savings.
The continued growth of fair-trade market components in both established and emerging fair-trade markets (including in Africa) possibly offers price advantages if the costs of certification can be kept to a minimum. The launch of Fairtrade Eastern Africa could offer significant costs savings in this regard, if internationally acceptable local certification capacities can be established.
3.3 Getting to grips with the multifaceted impact of climate change
Although there are already initiatives to get to grips with production challenges related to climate change, the effects of climate change are likely to be multifaceted. For example, given the current altitude at which tea is produced in Kenya, there are minimal incidences of disease and pest that need to be addressed, meaning that pesticide residues are not currently a problem. But with climate change, tea production may need to relocate to new areas where pesticide use may be required, which would then give rise to pesticide residue management issues. Consideration of the likelier knock-on effects of climate change should form an integral part of the proactive responses to climate change.
3.4 Strengthening the legal framework for GI and trademark protection
Given the scope for the marketing of quality-differentiated speciality teas, there would appear also to be scope for regional cooperation in both identifying the most cost-effective means of securing intellectual property right protection for speciality tea products, and in establishing appropriate legal frameworks for GI and trademark