Tea: Trade issues for the ACP

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31 March 2010

Executive brief: Update, April 2010

About this update

CTA’s Executive brief: Tea: Trade issues for the ACP, was published in April 2009 and in CTA’s Agritrade: ACP–EU Trade Issues (2009 Compendium). This update consists of:

1. Background and key issues: briefly summarising the original executive brief, and where necessary, updating developments related to key issues;
2. Latest developments and implications for the ACP: reviewing developments that have taken place since the publication of the original executive brief; Examining the implications of recent developments for the ACP countries concerned.

The original executive brief (2009) is available on request from: agritrade-mail@cta.int.

1 Background and key issues in the tea sector

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.

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.

After some 40 years of declining in real terms, tea prices more than doubled between 2002 and September 2009, rising from 154 US cents a kg in 2003, to 238 US cents in 2008, and to 318 cents a kg in September 2009.

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.

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.

The largest of the companies, Unilever, grows 35,000 tonnes of tea 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 50,000 tonnes of tea a year. It is also one of the world’s largest tea trading companies.

The Tata Tea group is the world’s second largest global branded tea operation with a presence in over 60 countries. The prominent companies in the group are Tata Tea and the UK-based Tetley group. The high level of industry concentration raises issues of competition policy.

Tea is mainly sold by auction. There are two auction centres in ACP countries, both in Africa - Mombasa, Kenya and Limbe, Malawi. A rival to the African auction centres, the Dubai Tea Trading Centre, was set up in 2005. The centre trades and processes teas from 13 producing countries, including six ACP countries.

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, Seychelles and Swaziland export tea.

Kenya accounts for over half of the tea output in ACP countries and remains the world’s largest tea exporter. Malawi, Uganda and Tanzania are the next largest ACP producers, with Malawi’s production just over one-eighth of Kenya’s.

Global tea imports in 2007 totalled 1.464 million tonnes, of which the EU imported 335,815 tonnes, 22.94% of the total. The UK imported 157,280 tonnes, 46.8% of EU imports. Germany, with imports of 48,408 tonnes, was the EU’s second largest importer with 14.4%. Other major tea importers are Egypt, Pakistan, Afghanistan, Russia, Sudan, Kazakhstan and north America.

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 (with a minor exception). According to the EC, the main issue concerning the tea sector is the way its producers are unprotected from 'copycats'. (see section 4.2).

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).

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

2 Latest developments and implications for the ACP

2.1 The international tea market

World tea prices reached record levels in 2009, due mainly to supply shortages caused by drought in major producing countries, notably India, Sri Lanka and Kenya. The 21 tea-producing ACP countries produced less tea in 2009 than in 2008 but enjoyed record prices for the crop, around 30% higher than in 2008. Tea sales at the Mombasa auction in 2009 totalled 279.3 million kg compared with 303.1 million kg in 2008. Increased demand for tea was an additional factor behind the price rise. Consumption of tea outpaced production between 2005 and 2009 by an estimated 0.8%.

Tea prices would come under pressure from increased plantings and supply. Should producers over-react to the current high prices by planting more crops, then over-supply and much lower prices could again result. Some ACP producers have responded to high tea prices by announcing plans for more investment in the crop.

Given normal weather, world tea prices in 2010 could be a shade lower than in 2009, although, with rising demand, some predictions are for a modest increase.

2.1.1 Global production and consumption

Global tea production reached 3,832,650 tonnes in 2008, a rise of less than 0.3% over 2007. China accounted for 32.8% of world output in 2008, followed by India, 24.1% and Kenya 9.0%. ACP countries account for 29.7 per cent of global tea exports, with Kenya the world’s largest tea exporter.

Indications of output figures for 2009 suggest a global fall, with a drop in Kenya and Sri Lanka of about 10%, little or no change in India, and with Malawi the only major ACP tea producer to record an increase.

Consumption of tea outpaced production between 2005 and 2009 by an estimated 0.8%, says the FAO. The gap was largest between 2007 and 2009 when consumption growth outpaced production by 3.4%. Consumption is rising in the UK and Ireland and also in the Middle East, Pakistan and Egypt, with demand remaining strong despite the global recession. The UK buys around half the tea imported into the EU. Russians are also major tea consumers.

 Table 1: Tea production

Source: FAO and F O Lichts

2.1.2 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.

A rival to the African auction centres in Mombasa and Limbe, the Dubai Tea Trading 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. The centre serves the Middle-East, the most important market for Kenya’s teas. More than 70 companies, including Unilever, have joined. Tea trade through Dubai fell from 148.6 million kg in 2008 to 112.3 million kg in 2009, following the fall in global output. The centre is reported to be considering the launch of a tea futures market.

2.1.3 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 since bounced back, more than doubling between 2002 and September 2009. They rose from 154 US cents/kg in 2003, to 238 US cents in 2008, and to 318 cents/kg in September 2009 (The FAO Tea Composite indicative world price for black tea). The rise was due to droughts in Sri Lanka and Kenya and also to increased demand.

Table 2: FAO composite prices

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

FAO Press Release, 22nd December 2009, http://www.fao.org/news/story/en/item/38315/icode/

Prices therefore increased by more than 50% between 2007 and 2009. But the average price (in the above table) hides important variations between countries. Average auction tea prices in 2009 at the main Sri Lankan tea auction were 332 US cents/kg, in India 290 US cents/kg and in Mombasa 272 US cents/kg. Prices reflect quality and speciality.

After taking inflation into account, the real price of tea may still be less than it was 40 years ago. In 2010, the return of normal weather patterns in the main producing regions indicates increased supplies, although demand may help to maintain price levels.

In the first three months of 2010, prices at the Mombasa auction seemed to be holding up and even increasing over the 2009 average. From January 1st to late March 2010, the price at Mombasa averaged 287 US cents/kg.

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.

2.1.4 The economic significance of tea to ACP countries

ACP countries accounted for about 14.5% of global tea production in 2008, and 29.7% of exports. ACP tea exports to the EU increased by just under 4% in 2008 to 117,377 tonnes, from 113,869 tonnes in 2007, to account for around 40% of the EU’s overall tea imports Uganda’s tea exports more than doubled in volume in 2008, while Tanzania’s increased by over 170%.

While Kenya’s tea exports to the EU fell from 94,034 tonnes in 2008 to 87,357 tonnes in 2009, revenue in 2009 rose to US$920 million, an 11% increase from $826 million in 2008. Kenya exported less tea in volume but earned more from the crop.

Table 3: Tea production and exports of ACP countries and other major exporters to the EU

* Jan-Sep 2009; ** includes re-exports

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. Kenya accounts for 22% of the world tea exports. Tea is Burundi’s largest hard-currency earner after coffee. A number of ACP countries plan to give tea more prominence in their economics. Ethiopia announced plans in March 2010 to develop strategies to boost tea production. The country currently produces about 7 million kg of tea from three privately run estates. Some 50,000 hectares of land has been identified as suitable for production of the beverage. Kenya has announced more plans to boost tea output. The Rwanda Tea Authority is planning to increase tea plantations by 75% from 12,000 hectares to 21,000 hectares by 2012. Burundi's tea output is forecast to rise by 8.5% in 2010. The expansion plans could, however, exert downward pressure on world tea prices.

2.2 Challenges and opportunities for the ACP tea sector

2.2.1 Main trends: opportunities and threats

World tea prices in 2010 seem poised between rise and fall, although prices fell in the first three months of the year. Given normal weather, and a return to more normal output, (the Tea Board of Kenya, forecasts, for example, that Kenya’s production will rise by more than 15% in 2010) prices could be a shade lower than in 2009. With demand rising, however, some predictions are for a possible 10-15% price rise. By 20 April 2010 the average price of African teas at the Mombasa auction had fallen to 270 cents a kg compared with 297.7 cents a kg in December 2009.

A positive sign for ACP exporters is that with demand from consumers rising, tea exports are likely to increase. As China and India are trying to increase local consumption of tea, their exportable surplus is reducing. The two countries are likely to consume a growing percentage of the world's tea over the coming decades, leaving more space on global markets for ACP exporters.

The health benefits of tea could be highlighted in order to encourage increased consumption. The tea industry is likely to publicise research that shows, for example that substances found in green tea could help fight eye disease; that green tea is a natural remedy for losing weight; that men who drink tea have smaller waistlines than those who don't.

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'.

But there are threats to tea prices and revenues. While ACP countries should continue to earn good revenues from their teas in 2010, there are doubts about the longer-term. Should the current high prices encourage more tea to be planted than the market demands, then prices would fall back. The FAO has cautioned tea producers not to overreact to 2009's price rally by expanding plantings. It takes at least three years after planting before the effects of increased output are seen on prices.

Higher-yielding varieties of tea are being developed which may be technologically sound, but which could lead to lower prices. The Tea Research Foundation of Kenya recently added two new clones to enhance production, saying that it expects to see a sustained growth in quality and production. These clones have the ability to withstand the vagaries of weather and post good returns if managed properly, it says.

Cooperation between tea-producing countries over new plantings would seem beneficial. As countries exported a lower quantity of tea in 2009 but often earned more foreign exchange from the crop, producer agreement on supply management could be a promising way forward. India has announced that it would not be expanding current tea areas beyond what is required for replanting and rehabilitating existing tea gardens.

A wider factor concerns climate change. The increasing impact of climate change is already generating unpredictable harvests, leaving many small-scale tea growers struggling to plan for the future. 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 would yield less.

Arid areas could expand due to increased warming, and encroach into areas suitable for tea cultivation, according to the fourth assessment report of the Intergovernmental Panel on Climate Change 2007. If temperatures rise by 2°C, large areas of Kenya currently suited to growing tea would become unsuitable. Sensible planning would avoid planting new bushes in lower altitudes, move tea bushes to higher altitudes where possible, and consider a degree of diversification.

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.

2.2.2 The need for investment to improve quality and add value

Tea from many ACP countries fetches low prices, showing the need for investment to raise quality. From 1 January to 23 March 2010, for example, ACP teas sold at the prices shown in Table 4.

Table 4: Mombasa auction average price: (US cents/kg)

Source: Africa Tea Brokers, 22/23 March 2010, Mombasa auction report

These prices are low compared with tea prices fetched, for example, at Sri Lanka’s Colombo auction - an average of 334 US cents/kg in February 2010. This demonstrates the potential for ACP countries to earn more from their tea, by improving quality and by developing single-origin or brand-differentiated teas. These could be combined with Fairtrade. For example, a single-origin tea called Lost Malawi Tea comes from a small Fairtrade estate in the Shire Highlands of Malawi. It is claimed to be ‘an old fashioned tea crafted in small batches with great care ... and quality almost forgotten’.

Consumers are increasingly looking for good-quality and speciality teas. Kenya and Rwanda also produce speciality teas in this category, which attract good prices. The speciality India tea Darjeeling has fetched as much as £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. New strategies aimed at adding value and reducing production and marketing costs are also needed.

2.2.3 Fair-trade tea: a challenge for the ACP

‘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.

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. There are 93 ‘Fairtrade’ certified tea producers, 39 of them in ACP countries. While the system is proving valuable, producers are only able to sell a small proportion of their tea on Fairtrade terms, as there is not enough consumer demand to buy all their output.

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 to 9,618 tonnes in 2009, a rise of 3% from 9,335 tonnes in 2008 when sales rose from 3,410 tonnes in 2007, a jump of 170%, largely due to the major retailer Sainsbury’s switching to ‘fair trade’. Fairtrade-certified tea now accounts for 10% of UK tea sales.

The market for fair-trade certified tea and ethically sourced tea should 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 2 million people will ‘benefit from better crops, better incomes and better livelihoods’.

The EU could aid ACP producers by helping them to gain Fairtrade certification for their tea, by encouraging speciality tea, by 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.

2.2.4 The future of ACP-EU trade relations in the tea sector

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; air wages and working conditions for employees;
• ‘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.