ACP-EU Trade Issues in the Tea Sector

1. The international tea market
1.1 Market break-down
1.2 Global production and consumption
1.3 How the tea market works
1.4 International producers and traders
1.5 Major trends in the market
2. The ACP tea sector: production structure and exports
2.1 The competitiveness of ACP tea
2.2 The economic significance of tea to ACP countries
3. The EU market and its import regime
4. Challenges and opportunities for the ACP tea sector
4.1 The need for investment to improve quality and add value
4.2 Geographical indications
4.3 Exploiting the ‘fair trade’ market
4.4 Other trends: possible opportunities and threats
5. Conclusion
Sources

Summary

Of the 36 world tea producers, 21 are ACP countries, including the third largest producer, Kenya, which is also the world’s largest exporter. Tea is mainly sold by auction, but the industry is dominated by a few vertically integrated companies. Prices are volatile, higher in 2008 than in 2007, although falling towards the end of 2008 and remaining low in real terms. The EU is an important market for ACP countries, and applies no tariffs (with a minor exception). Fairtrade certified tea is of growing significance, and other ‘luxury purchase’ developments could yield higher earnings for responsive producers in the future. Climate change has implications for tea production, as higher temperatures could threaten bushes. Drought in key tea-producing areas in 2008 affected production, causing consumption to run ahead of production. The EU could aid ACP producers by helping them to promote fair trade tea as well as the use of geographical indications (GIs), by expanding its ‘aid for trade’ financing, and by acting with them to reduce the abuse of dominant market positions by large companies.

1. The international tea market

1.1 Market break-down

There are two major types of tea, black and green. Black tea accounts for around 75% of global production and over 90% of the market in Western countries. Black tea results from leaves that are fully oxidised, while green tea leaves are steamed, rolled and dried without any oxidation. Most green tea is grown in China and is gaining popularity in the West, partly for health reasons.

FAO projections for the ten years to 2017 indicate that world production of black tea will grow at 1.9% annually from about 2.5 million tonnes in 2006 to reach 3.1 million tonnes while world production of green tea is expected to grow at a considerably faster rate of 4.5% annually to reach 1.57 million tonnes.

The FAO believes that in these years the expansion of tea production could substantially exceed growth in consumption, with the current situation of market balance being transformed into one of growing surplus production. This could serve both to depress prices and reduce returns to producers in developing countries. In this context increasing attention is being paid to ‘expanding consumption in producing countries’ and getting to grips with the challenge of establishing quality standards. According to the FAO ‘better quality should increase demand while preventing low-quality tea from being traded should curtail the over-supply situation in the world tea market.

1.2 Global production and consumption

Tea is grown in 36 tropical and semi-tropical countries, 21 of them ACP countries. The six largest producing countries - China, India, Kenya, Sri Lanka, Indonesia and Turkey (in that order) - account for around 80% of world output. Less than half of production is exported, as China and India, in particular, are major consumers as well as producers.

Global tea production has grown by around 2% a year since 1993-95, but consumption in Western countries has grown by barely 1%. In 2007 world tea consumption virtually stagnated, increasing to 3.668 million tonnes from 3.649 million tonnes in 2006, a rise of only 0.13%. However, in a number of developing countries, consumption has kept pace with or exceeded production. China’s total consumption overtook India’s in 2006, following an increase of 13.6%. The UK buys around half the tea imported into the EU. Russians are also major tea consumers.

Global production grew by 2.3% in 2007 to 3.735 million tonnes. China accounted for 30.6% of world output, followed by India, 24.5% and Kenya 8.1%.

Tea production

Source: FAO

ACP countries account for about 13% of production, but 28% of exports. FAO figures for 2008 suggest a rise in consumption to 3.856 million tonnes, a 5.1% increase on 2007, and an increase in production of only 1.2%, to 3.78 million tonnes. Drought in the tea-producing areas of India, Kenya and Sri Lanka affected production in 2008. Consumption was therefore higher than production.

1.3 How the tea market works

Tea is unusual among major agricultural commodities in that it is sold through auctions or in private deals, increasingly on-line. Unlike coffee or cocoa, there is no futures market for tea.

There are two auction centres in ACP countries, both in Africa. The major centre in Mombasa, Kenya, offers between 60,000 and 90,000 packages of tea every week, with teas mainly from Kenya, but also from Burundi, Malawi, Rwanda, Uganda, Tanzania and Zaire. The other auction centre, in Limbe, Malawi, sells teas from Malawi and occasionally from Mozambique, Zimbabwe and Zambia. Due to the seasonal nature of Malawi's tea production, the auction operates weekly for the six months of the season - between December and May - and fortnightly thereafter. On-line tea auctions have recently been set up alongside traditional auctions. These speed up access to information and facilitate participation. Bids can be submitted at any time and the sale process is not geographically confined. Transaction cycle times and the stages in handling are reduced. Also teas need not be transported to warehouses as inspections can be carried out using samples couriered to buyers from the plantations.

Although the auction system would seem to approximate a 'fair market' in which prices are determined solely by the interplay of supply and demand, the system does not always work well for small-scale producers. Auction prices vary considerably with both the quality and quantity of tea on offer, and the demand for tea at any given time. A small number of companies dominate sales at each auction centre.

There is evidence of collusion among brokers to influence prices. A number of investigations have revealed 'a high degree of collusion that prevails in buying and ... wide scope for collusion between brokers and buyers'. Such collusion, if it occurred, would tend to reduce the price at which producers could sell tea at the auctions, and would also affect prices of direct sales. Indeed, in 2005 the situation was deemed so bad that the Kenyan National Chamber of Commerce called for the elimination of tea auctions. The extent of this alleged collusion by buyers raises important issues of competition policy of the kind that the EU has routinely taken action against in the sugar sector within the EU.

A rival to the African auction centres, the Dubai Tea Trading Centre (part of the Dubai Multi-Commodities Centre) was set up in 2005. The centre trades and processes teas from 13 producing countries, including Kenya, Malawi, Rwanda, Tanzania, Zimbabwe, Ethiopia, as well as India, Sri Lanka, Indonesia, Vietnam, Nepal, China and Iran. Its mandate is to further increase the tea trade in and through Dubai. The centre serves the middle-east, the most important market for Kenya’s teas, offering free storage for up to 60 days, preferential clearing at Dubai ports, financing, the use of blending facilities and a 50-year tax holiday. More than 70 companies, including Unilever, have joined. In 2008 14,860 tonnes of tea were transacted through the centre.

1.4 International producers and traders

A small number of companies dominate the tea industry. They have a presence at almost all stages of the journey of tea from tea bush to tea bag or packet. The companies either grow tea on estates, or buy tea at an early stage of production, and usually carry out the high-value-added blending and packaging (which account for 80% of the retail price), at facilities in the EU and other Western countries.

Blending means that many tea qualities have become exchangeable and are bought wherever they are cheapest. The major companies are not reliant on any one particular source and can easily freeze out a particular producing country if it does not co-operate with the needs of the company.

The largest of the companies, Unilever, grows 35,000 tonnes a year on its estates in Kenya, Tanzania and India, and buys and sells a much larger quantity - 290,000 tonnes - from other estates and sources. Its major brands, which include Lipton, PG Tips and Red Label, are available in more than 100 countries. James Finlay has tea estates in Kenya, Uganda and Sri Lanka, growing and manufacturing over 45,000 tonnes of tea a year. It is also one of the world’s largest tea trading companies. Tata Tea Group of Companies, which includes Tata Tea and the UK-based Tetley Group, is the world's second largest global branded-tea operation with a presence in 40 countries. The high level of industry concentration raises issues of competition policy.

1.5 Major trends in the market

There is no single world price for tea but rather differing prices at different auctions. Between 1970 and 2002 the price trend was downward, with World Bank figures suggesting that tea prices fell by 44% in real terms over these years. Prices have increased since 2002: average monthly prices rose from 154 US cents a kg in 2003, to 203 US cents a kg in 2007 and to 242 US cents in 2008. The first three months of 2009 saw a 15% price increase in the average price on the Mombasa auction over the December 2008 level caused by drought and input constraints. Drought has affected the three main global producers with output predicted to fall by 5% in Kenya and more in Sri Lanka.

Sources: FAO: Committee on commodity problems - Intergovernmental group on tea- Current situation and medium outlook- May 2008 ftp://ftp.fao.org/docrep/fao/meeting/013/k2054E.pdf

F.O. Lichts, World Tea Markets Monthly, February 2009, average of three main auctions (Calcutta, Colombo and Mombasa)

The price rise came from signs that the over-supply situation was improving. However after taking inflation into account, the real price of tea has still dropped substantially, with producers receiving only around half what they did 30 years ago.

Auction centres could become redundant with technological advances. At present almost all tea fields are located in regions where land-phone lines intermittently fail or do not exist. With the development of the internet through mobile phones, however, and given that many plantations are financed by large companies, tea estates will in the future be able to post real-time data daily onto the internet, enabling a viable futures market.

The global process for bringing buyers and sellers more directly together is already taking place with catalogue sales of premium tea. ACP producers need assistance to access information to enable them to exploit on-line auctions.

The immediate outlook is for prices to come under pressure, especially as production far exceeded demand in 2007 (but not in 2008). The average fall in price of the three main auctions in early 2009, was to 219.2 US cents a kg in January and 214.3 cents in February. Over-supply could therefore again dog the market.

Auction prices show huge variations among African producers, but the range of prices in part reflects different grades and qualities. In the week ending March 21st 2009, for example, the weekly report of the Africa Tea Brokers showed that the average auction price in Mombasa was 214 US cents per kg, but tea from Kenya fetched 227 cents, from Rwanda 215 cents, from Burundi 211 cents, from Uganda 180 cents, from Tanzania 146 cents, and from Malawi 132 cents per kg.

2. The ACP tea sector: production structure and exports

The 21 ACP tea producers are Burundi, Cameroon, DR Congo, Ethiopia, Kenya, Lesotho, Mali, Malawi, Madagascar, Mauritius, Mozambique, Nigeria, Papua New Guinea, Rwanda, Seychelles, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. All but Lesotho, Mali, Nigeria, Seychelles and Swaziland export tea.

Kenya accounts for over half of the tea output in ACP countries. Malawi, Uganda and Tanzania are the next largest producers, (in that order) with Malawi’s production being only one-eighth of Kenya’s.

Globally, most tea is grown on plantations. In the ACP countries small-scale growers are also prominent; in Kenya, they account for about 60% of the country’s tea production. Smallholders often grow tea bushes alongside staple crops for their own consumption. Earnings from tea may provide their only cash income.

Out-sourcing is practiced in some countries - in Zimbabwe and Malawi, for example - with growers using their own plots to grow tea on contract for plantations. Only the smallest producers farm their land entirely with family labour, and many smallholders employ workers, often on a casual basis. On plantations, the use of child labour seems common in many of the poorer tea-producing regions, due to the economic conditions of the household and lack of schools.

Low prices for tea tend to be passed on to the poorest segments of a country in the form of low wages on plantations. Given that it is easier to cut costs (by reducing labour costs) than raise prices (it is impossible for a producer country to attempt this unilaterally), producing countries have to remain competitive by lowering wages – which partially accounts for the rut in which plantation wages are caught.

Labour costs account for over half of the cost of production, and approximately 75% of that arises in plucking. There is downward pressure on farmers’ incomes and labourers' wages and working conditions, even though the proportion of wages in the consumer price of tea is low.

Tea production and exports of ACP countries and other major exporters to the EU

Sources: FAO; EC Helpdesk, F.O. Lichts.

ACP countries account for around 13% of world production and 40% of the EU’s imports. ACP tea exports to the EU increased by 5.6% in 2007 to 113,869 tonnes, from 107,830 tonnes in 2006. Rwanda’s tea exports more than doubled in this time, Mozambique’s increased by 40%, Malawi’s by 4.4% and Kenya’s by 1.4%.

2.1 The competitiveness of ACP tea

Yields of tea and the cost of producing it vary enormously. In Kenya the estate sector is the most efficient with yields of about 2,670 kg/ha compared to yields from smallholders of 1,651 kg/ha. The low level among Kenya smallholders is attributed to low levels of fertiliser usage, poor husbandry practices and inferior management. Paradoxically, tea smallholders in Kenya generally earn more than tea workers, many of whom would prefer to be smallholders.

2.2 The economic significance of tea to ACP countries

Tea output is increasing in ACP countries, and tea exports account for around 15% of Rwanda’s total exports, 13% of Kenya’s and 6% of Malawi’s, but expansion could exert downward pressure on world tea prices.

Uganda and South Africa are vigorously developing their tea sectors, the latter partly through red tea (rooibos), worldwide export sales of which increased by 400% between 1998 and 2003. Studies carried out in South Africa have shown that rooibos is rich in antioxidants and may help protect against damage that can lead to types of cancer and heart problems (note: strictly rooibos is not a tea).

3. The EU market and its import regime

Global tea imports in 2006 totalled 1.47 million tonnes, of which the EU imported 336,394 tonnes, 22.9% of the total. The UK imported 161,981 tonnes, 48.2% of EU imports. Germany, with imports of 45,591 tonnes, was the EU’s second largest importer with 13.6%. Other major tea importers are Egypt, Pakistan, Afghanistan, Russia, Sudan and Kazakhstan.

The EU’s historical relationship with ACP countries lays the basis for cooperation, given that EU countries do not grow tea. It has no restrictions on the import of tea, nor does it have quality standards. The EC describes tea as 'a totally liberalised market'. The most favoured nation (MFN) tariff is zero, and there is no tariff escalation if tea is processed. However, on small packages only, a rate of 3.2% ad valorem tax applies on imports into the EU of ‘green tea (not fermented) in immediate packings of a content not exceeding 3 kg’; on black tea the rate is 0%. The entry of Turkey, the world’s sixth largest tea producer, into the EU could change this and cause considerable, but as yet unknown, repercussions for ACP countries.

According to the EC, the main issue concerning the tea sector is the way its producers are unprotected from 'copycats'. Around 10,000 tonnes of 'Darjeeling' tea, for example, is produced from the estate in Darjeeling, India, but 30,000 tonnes is sold under this designation around the world (see section 4.2).

4. Challenges and opportunities for the ACP tea sector

4.1 The need for investment to improve quality and add value

Investment is needed to raise the general quality of ACP teas which are often low. This is reflected in prices at the Mombasa and Colombo (Sri Lanka) auctions. For instance in January 2009, tea fetched an average of 219.3 US cents per kg in Mombasa compared with 245.9 US cents per kg in Colombo. The Mombasa price was however higher than the Calcutta auction price of 192 US cents per kg.

More investment is also needed to produce speciality teas. Teas in this category from Kenya and Rwanda and other ACP tea-producing countries are in demand and have attracted good prices. Speciality teas from India have earned a reputation for high quality and fetch very good prices. A batch of genuine Darjeeling tea, for example, fetched a record, if exceptional price, in 2003 of £223 per kg, compared with less than £1 per kg for ordinary teas.

Tea-producing countries would profit from expanding into upstream activities, adding value in their own country, and generating additional employment, income and revenue. Efforts by producers to enter activities such as blending have been hampered by poor market information and inadequate marketing strategies, aggravated by a lack of funding. The Kenya Tea Development Agency (KTDA), which processes and markets tea on behalf of its 370,000 smallholder owners, wants to reverse this. In early 2004 the KTDA announced that three new tea brands are being produced in Kenya for export: green, orthodox and flavoured tea. The development of the products was inspired by a need 'to meet new customer demands'. New strategies aimed at adding value and reducing production and marketing costs are also needed, especially to meet changing tastes.

4.2 Geographical indications

A major thrust of EU policy is to shift its own production from bulk basic commodities to differentiated ‘luxury purchase’ commodities, often conveniently distinguished by designations of origin. Accordingly the EC would like to see an international register of food-and-drink products that are made from a special recipe, or are from a specific region, that may not be copied (full protection is currently limited to wines and spirits), and this could prove of benefit to ACP countries seeking to add value to their own basic commodities. Thus the March 2005 WTO ruling on geographical designations of origin should help ACP countries which want to develop regionally specific teas. The EU believes that the ruling upholds its system of granting protection to products with specific geographic origin (GIs).

India is making new moves to get speciality teas into EU markets. In late March 2009 it was reported that it expects to get GIs for Darjeeling tea registered with the EC ‘in the next two months’.

'There is ample evidence that geographical indications are instrumental in fostering market differentiation leading to premium prices. The resulting consumer recognition and product reputation should therefore be safeguarded against unfair competition and imitations via WTO-wide rules', according to an EC report.

‘Rooibos’ (redbush) tea, although not strictly a true tea, is an example of a commodity for which the industry in South Africa is investigating the relevance of seeking registration with a GI.

4.3 Exploiting the ‘fair trade’ market

An increasing number of tea growers and plantation workers are benefiting from selling their tea in the ‘fair trade’ system, with a ‘Fairtrade’ label. Products are certified by the UK-based Fairtrade Foundation, a member of the Germany-based Fair-trade Labelling Organisation International which sets the certification standards.

‘Fairtrade’ certified tea is sourced from tea estates and democratic small-farmer organisations under terms of trade which include:

• fair wages and working conditions for employees;
• payment of a negotiated fair price to producers (estates and smallholder organisations);
• an additional premium for investing in social, economic or environmental programmes.

Sales of ‘Fairtrade’ certified tea are growing rapidly, notably in the UK which buys over 80% of the ‘fair trade’ tea imported into the EU; sales in the UK increased from 3,410 tonnes in 2007 to 9,335 tonnes in 2008, a rise of over 170%, and accounting for just under 7% of the UK’s total tea sales.

CaféDirect, a UK-based ‘Fairtrade’ company, buys most of its teas from east Africa and sells under the TeaDirect label. The minimum price it pays varies between US$1.75 per kg and US$1.88 per kg, depending on the grade. The price paid to growers rises when auction prices rise. In addition, CaféDirect pays a premium of US$0.60 per kg for the social needs of communities. ‘Fair trade’ auditors inspect regularly to ensure the money is spent wisely and fairly to benefit local communities. Under a producer partnership programme, Cafédirect also supports the Kiegoi and Michimikuru tea factories in Kenya to assess and minimise their environmental impacts; ‘the positive results are astounding’, it says.

Another major UK-based company, Traidcraft, buys chiefly from Uganda. More than 70 ‘Fairtrade’ certified teas are now marketed. Around 80 tea-producing organisations in six ACP countries are part of the ‘fair trade’ market and the system has proved a lifeline for many producers.

The Kayonza tea-processing factory in Uganda is an example of involvement in the ‘fair trade’ system. The factory is collectively owned by about 3,100 smallholders, who together cultivate 1,300 hectares of tea, but most work very small plots of land (usually less than 0.2 hectares under tea). They took over the factory after it was privatised.

4.4 Other trends: possible opportunities and threats

There are some favourable trends: with consumption running ahead of production in 2008, the immediate outlook for prices seems favourable. Russia, the world's largest tea importer, is expected to increase purchases by up to 5% in 2009 as consumers switch from higher cost drinks to cope with the economic slowdown. This could also happen in other countries.

Lower oil and fertiliser prices should help to reduce the cost of tea production and could increase output, The USA imported 9% more tea in 2008 than in 2007, and the US market appears to hold considerable potential. The health benefits of tea could be highlighted in order to encourage increased consumption. The market for ‘fair trade’ certified tea and ethically-sourced tea should grow.

The market for Fairtrade certified tea should continue to grow, and a new market is opening for ethically sourced tea. This follows a decision by Unilever to source all its tea from sustainable ‘ethical sources’. The company claims that up to two million people will ‘benefit from better crops, better incomes and better livelihoods’. It has asked the Rainforest Alliance to start by certifying tea farms in Africa.

Tea will also be put to new uses: 'Trendy tea - tea will come to reflect our life-style choices and values. Hip bars in France, the UK and the USA are already serving champagne teas and Earl Grey martinis'. In an effort to make tea more convenient to prepare, the tea industry has introduced a ‘tea tablet’. Invented in Japan, this could help to widen the market. Scientists at the world's largest tea-research facility, in Assam, India, are also reported to have developed a tea tablet. However, instant tea was a commercial failure when introduced into the UK about two decades ago.

On the less favourable side, the global credit crunch could mean that smallholders, tea factories and traders will find it difficult to raise credit, thereby affecting output.

A wider factor concerns climate change. Tea bushes yield the best quality tea between 18 and 32 degrees Celsius. Should global warming cause temperatures to rise by 2 degrees Celsius, as is widely predicted, and if these rises occur in ACP tea-producing countries, then bushes in lower altitudes could suffer. Sensible planning would avoid planting new bushes in lower altitudes, move tea bushes to higher altitudes where possible, and consider a degree of diversification.

5. Conclusion

While there are no tariff issues in EU-ACP trade relations in the tea sector, this does not mean that there are no issues that need to be addressed. Internally, the EC has routinely used provisions of its competition policy against ‘abuse of a dominant market position’ to prosecute and fine EU sugar companies for collusion in setting sugar prices. The question therefore arises: will the EC agree to joint ACP-EU action against international companies which collude in setting prices of major commodities such as tea, thereby abusing a dominant market position?

There also appear to be a number of key ‘aid for trade’ issues in ACP-EU trade relations in the tea sector. We might ask whether the EU will be willing to use:

• ‘aid for trade’ instruments in a structured and systematic way to assist in developing tea production in ACP countries serving the ‘quality’ end of the EU tea market, thereby improving the prices received for teas?
• ‘aid for trade’ support to assist ACP countries in developing production for the ‘fair trade’ market and in further promoting this market within the EU?
• ‘aid for trade’ support to assist ACP countries in procuring the technical expertise to be able to move up the tea value chain through developing blending operations to serve EU markets directly?

Initiatives in these areas could greatly help ACP countries to increase the value obtained from tea production.