Tea Industry Analysis
Post on 13-Oct-2015
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DESCRIPTIONJayshree Tea Industries Ltd
INTRODUCTIONThe tea industry in India is about 172 years old. It occupies an important place and plays a very useful part in the national economy. The industry combines both agriculture and industry.Tea plantations in India are mainly located in rural hills and backward areas of North-eastern and Southern States. Major tea growing areas of the country are concentrated in Assam, West Bengal, Tamil Nadu and Kerala. The other areas where tea is grown to a small extent are Karnataka, Tripura, Himachal Pradesh, Uttaranchal, Arunachal Pradesh, Manipur, Sikkim, Nagaland, Meghalaya, Mizoram, and Bihar. The competitors to India in tea export are Sri Lanka, Kenya, China, Indonesia and Vietnam.
There are basically two types of tea sales in India - through Auctions and Private Sales, also called as ex- garden sales. In Auction sales, tea is auctioned at auction centers through brokers to buyers who either sell it to wholesalers / retailers or export to overseas markets.
Tea is generally placed in the restricted category of the EXIM policy. Through special Import License tea can be imported by paying import duty. Since August 1998, tea is being freely imported from the SAARC countries. Under the EQU / EPZ units tea can be imported for re exports after value addition.The tea plantation industry is strictly guided by various statutory Orders through the Acts of Parliament like - Tea Act, Essential Commodities Act, Plantation Labour Act, Factories Act, PFA Act, Standards of Weights and Measures act etc.Quality control strictly conforms to IS 9723 and Prevention of Food & Adulteration Act (PFA). Disposal of tea waste is done through the tea waste control of 1959. Many gardens are now taking quality certifications under ISO 9002:Some statistical facts about the Indian Tea Industry: The total turnover of the industry is around Rs. 10,000 crores. Since independence, tea production has grown over 2505, while land area has grown by 40%. Total net foreign exchange earned per annum is around Rs.1847 crores. Industry is labour intensive and employs over 1.1 million workers and generates income for 10 million people indirectly. Women constitute 50% of the workforce. 802 M.Kgs or about 82% of total production of 981 M.Kgs of tea went for domestic consumption.
RECENT DEVELOPMENTSInspite of its importance, tea industry of India is going through a crisis phase since 1990s. The industry has witnessed many structural changes during recent years, which include emergence of small tea growers in place of large plantation and introduction of bought leaf factories (BLF). The present crisis has led to the closure of many tea estates (e.g., 20 estates in Kerala, 30 in West Bengal, about 70 in Assam have close down since the late 1990s). In early 2005 the tea industry witnessed major companies withdrawing from production and concentrating on the packaging/ retailing sector (e.g. Tata. Tea, HLL etc in India). In the market, the rising competition at domestic as well as international front has deepened the crisis of tea industry of India. . Shift in the composition of demand for tea in the importing countries has had unfavorable effects on export earnings from tea in India. The international market price of tea has declined from US $ 2.09 to US $ 2.03 per kg in between 2005 and 2006. Though countries like Sri Lanka, Kenya and Indonesia are growing fast in their export and higher price realization, during the same period. Export of tea from India to some of the major importing countries like Russia, UK, and USA are showing a sharp decline.Although, per capita consumption of tea in India is amongst the lowest (64 grams), but in volume terms India is the largest consumer. Since 1970, India has become the largest absolute consumer of tea after UK. Larger domestic demand has given a new direction to the tea industry in the recent years.
Major causes of the crisisDespite Indias historical success with the tea industry, in recent years, the industry has faced serious competition in the international and national market which has lead to the present crisis. Tea prices in India are being driven down by many factors:a) Decline in demand for Indian tea in the global market b) Defects in auction systemc) Poor price realizationd) Defective market structure e) Increase in cost of production
Recommendations for improvement Despite being the largest producer and consumer of tea, the Indian plantation sector lacks appropriate mapping of production and consumption levels. Due to absence of accurate estimates the formulation of long term industry wide action plans have been affected. India has concentrated more on building up its large estates and has given less attention to processing and improving the quality by proper blending and marketingfor higher price realization of their products. Unlike its key competitors, India does not have any powerful brand to support its promotion drive in the international market. Study done by the United Nations Food and Agriculture Organization (FAO, 2001) has suggested the need for reducing the unit cost of production through productivity gains, capacity building of small growers, streamlining marketing channels, improving infrastructure, tailoring marketing activities to individual countrys demand, propagating health benefits of tea and promotion of organic tea using the tea mark. This is exactly what the domestic tea companies should do for their long term survival. Improvement of supply chain management inside the country and global tea marketing network. The tea industry in India has a legacy of corporate farming right from the day of British rule. The current situation in the sector has given ample reason for a rethink on whether corporate farming can really boost agriculture International brands like Liptons, Brooke Bond of HUL and Tetly tea of Tata Tea; etc are the market leaders and have great power in price determination in both domestic and international market. This needs to be stopped and proper investigation is needed to curb the wrong practices in the tea market by introducing new laws to regulate the price movements. It has been observed that the actual producer of tea has no direct link with the ultimate consumer. Therefore, the producers do not understand the market demand / choice of the customer, it is very important in todays market economy for long term sustainability of the industry. With the withdrawal of sales restriction, the growers can directly go to the market by building their own brand. As the margin of profit is very high at the present domestic retail market, Indian tea growers should invest and take this opportunity for the promotion of their brand at the retail market. Fresh capital inflow is needed right at this moment for the tea industry of India. Investment in new plantations and production machineries must come immediately to compete in the international market. one of the most important steps from the government part shall be to introduce a stronger competition law to curb the misuse of corporate buying power and promote social objectives at the garden level.
CURRENT SCENARIO OF THE INDIAN TEA INDUSTRY
Tea is normally classified based on the processing, leaf size and grade. Fermentation is the major process and creates two major classifications:
Price TrendRecently tea prices showed bouyancy, which started from 2006, after depressed prices for almost a decade since 1999.A slump in global output, decline in production due to poor monsoon rains, steady increase in domestic demand, range-bound export volumes and low growth in production further drove prices upwards in 2012.However Indias tea production had picked up in the last quarter of 2012 and initial signs are pointing to better weather in 2010, signalling a possible change in the price trend. Even if prices do not retrace too much, producers may have to live with subdued prices during the year. It does appear that the two-year run of rising tea prices is losing steam.
Chart 1: Trend in Domestic Tea Prices (source: ICRA Research)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Production, consumption and ExportsA secular increase in domestic consumption on the one hand and muted increase in production on the other, has been the main factor supporting the increase in tea prices from 2006 onwards. According to ICRAs estimates, while the average growth in production during the period 2003-07 was just 1.9% or so, domestic consumption would have increased annually at around 3.5% during the same period. The steady increase in domestic demand, range-bound export volumes and low ICRA Rating Feature Indian Tea Industry: Outlook Positive for the Short to Medium Term ICRA Rating Services Page 3 of 8 growth in production absorbed the pipeline stock over the years and left virtually no carry-forward stock at the end of the 2007 season.Production and consumption of Tea in IndiaParticulars 200420052006200720082009201020122013
PRODUCTION (million Kg)854838878893946982945981696.7*
CONSUMPTION (million kg)673693714735757771786802828(E)
* production from January to Sepetmber - Estimated figureSource: ICRA ResearchExportsExports play a vital role in maintaining the overall demand-supply balance in the domestic market. Healthy export realisation is also crucial for domestic realisations as un-remunerative prices in the export market may lead to exporters dumping the produce in the domestic market, which in turn would exert a downward pressure on domestic prices. Tea exports from India have remained range bound over the period 1997-2011 with some year-to-year fluctuations seen in between.Export of Tea from IndiaYEARQUANTITY(Million Kg)Value(Rs. Crores)UNIT PRICE (Rs/kg)