India’s Tea Exports are Out of Step with World Demand

India tea production is increasingly out of step with world demand. India set an export target of 300 million kilograms for 2020 but based on year-to-date production totals it is unlikely to meet this goal. In 2018 tea exports will again be closer to 255 million kilograms where they have stalled in recent years. Exports are up slightly for the year compared to 2017 and teas sold at a slightly higher average price during the first eight months of 2018. The combination of increased volume and price earned $425 million from exports so far, up almost 3 percent compared to the previous year. “However, the unit price of the exported teas is feared to remain almost stagnant at INRs197 to 198 ($2.75) a kilogram,” according to tea exporters. Price is a proxy for quality. Complicating these projections is the imposition in November of U.S. sanctions on Iran, India’s top tea trading partner. The U.S. granted India a six-month waiver allowing it to continue to import oil from Iran so long as it reduces consumption. Unfortunately for India, oil is a critical link in compensating growers for more than 12 million kilograms of tea. Iran imports far more tea than it grows and as cash flow tightens, the Middle Eastern country exchanges oil to make up the shortfall. Last year Iran ordered 7.4 billion rupees worth of tea but concerns about payment led exporters to seek other more reliable partners. The challenge is that consumer preferences are changing in the next four largest markets for India’s tea: Russia, the U.K., the United Arab Emirates, and Germany.

Historical decline

In the 1950s, prior to the invention of the crush, tear, curl (CTC) process, India was the world’s dominate supplier of orthodox (loose leaf) black tea. Exports reached 230 million kilograms a year with demand in Europe, the Soviet Union, and the Middle East ensuring a competitive, lucrative market.

But orthodox production is labor intensive and 1.2 times more expensive than processing CTC. As consumption increased, India transformed into a mechanical powerhouse, processing black tea in large factories at an ever-more-efficient cost per kilogram. Domestic and export demand soared, and profits surged to the point that today 90.1 percent of the tea India produces is CTC. As CTC became the dominate style of tea in the major exporting countries of Kenya, Sri Lanka, and India, prices began to fall. Production exceeded demand and efficiency became a liability as maintaining high volume requires greater investment, bigger energy-intensive factories, and large numbers of laborer no longer willing to accept a pittance for their days’ work. In 2018 India will earn an average $2.70 per kilogram (INRs 197) for its CTC exports. Sri Lanka tea exports have averaged $3.32 per kilogram this year. China’s tea exports will sell for almost double these averages. In the meantime, global demand has shifted to the point where 50 percent of revenue is from orthodox and green tea. These numbers rise to 90 percent in some markets like the U.S. and western Europe, Egypt, UAE, and Iran. Prices rise appreciably to $35 per kilogram and reach as high as $400 per kilogram. Global preference for expensive, high-quality orthodox is out of sync with countries like India, Indonesia, Uganda, and Kenya where the tea industry is designed to produce massive volumes of cheap tea. As consumers re-discovered specialty and loose-leaf blends, India must once again rise to the challenge.

Seeking new markets

China has re-emerged as the dominate player in tea, earning $1.6 billion from exports in 2017 on much smaller export quantities than either India or Kenya. “China now accounts for 40 percent of world tea consumption and is drinking ever-greater quantities of green tea,” according to the Economist Intelligence Unit’s commodities report on tea. Growth in consumption has increased 10 percent per year for the past decade. Per capita the Chinese now drink 1 kilogram of tea per year. Surprisingly China ranks only 14^th globally in per capita consumption, well behind Turkey, UK, Ireland and Morocco.  Only 35 percent of Chinese regularly drink tea, but tea is growing in popularity with huge opportunity to grow. According to the Food and Agricultural Organization of the United Nations (FAO), “Global output of green tea is foreseen to increase at 7.5 percent annually to reach 3.6 million metric tons in 2027, largely driven by China, where the production of green tea is expected to more than double from 1.5 million metric tons in 2015-2017 to 3.3 million metric tons in 2027. But FAO also projects that due to interest in black tea, China will “reach the output levels of Kenya, the largest black tea exporter in the world.” It seems counterintuitive, but India benefits from selling tea to China. And that is just what is happening. This summer China lowered its import duties on tea and in November COFCO (China Tea Co.) signed a $1 million deal with Jay Shree Tea & Industries, one of India’s largest growers.

The way forward

India now consumes 19 percent of the world’s tea. The rate of domestic consumption is growing at double the world average. In addition, tea is more valuable with greater quantities packaged for sale in grocery and as ready-to-drink. Tea bags and sachets are becoming more popular in India. This suggests that India may interest its own citizens in consuming greater quantities of orthodox tea. Currently almost 50 percent of tea produced is by smallholders (farming less than 10 hectares). These growers can adapt to artisan methods that bring a better price for a better pluck. India’s tea bushes are old, with 40 percent planted in the 1960s. This means India will struggle to increase yield per hectare. Rising labor costs are now 50 percent of the cost of production (up 12 percent in the past three years). Confronted with similar economics Sri Lanka opted to produce better quality tea.  Today the tea auction in Colombo gets the highest price on average of any auction in the world. The justification is straightforward, Sri Lanka produces a consistently high-quality tea whether orthodox or CTC. The country accepted a trade-off: quantity for better quality. India should do the same. Sources: Financial Times, The Hindu Business Line, FAO