Food Processing] Tea, Coffee Supply Chain, Upstream, Downstream for UPSC General Studies Mains 1. Prologue 2.

Tea: Scope Significance 1. Tea Supply Chain: Upstream 2. Tea Supply Chain: Downstream 3. Tea Board of India 3. Coffee: Scope/Significance 1. Coffee Supply Chain: Upstream issues 2. Coffee Supply Chain: Downstream 3. Coffee Board of India 4. Mock Questions Prologue

Although I had planned this to be the last article under [Food processing] but heavy-rainfall in Gujarat randomly shutting down my landline internet and electricity, hence couldnt work on edible oil, bread-biscuit etc. topics. Theyll be published later on. This one covers only tea and coffee. Meaning one more article to go before The end of [Food Processing] series. Tea: Scope Significance

Indias rank production

in world (2012, as per Teaboard) 2

consumption 2 export 4

Provides employment to more than 50,000 workers around Darjeeling alone and overall ~5 lakh tea-farmers Brings ~4000 crore rupees through export.

Location REGION North: Assam, West Bengal TEA SEASON March-December.

South: Tamil Nadu and Kerala throughout the year

main states: Assam, WB, TN and Kerala small scale: Karnataka, Tripura, HP, Uttarakhand, Arunanchal, Manipur, Sikkim, Nagaland, Meghalaya, Mizoram, Bihar and Orissa.

For more on location factors: refer the [Geography] article click me Tea Supply Chain: Upstream

Old bushes=low yield

A tea plant is most productive between 15 and 35 years of its planting. Yields of tea usually drop after 50 years. Tea gardens in Darjeeling are about 80-100 years old. In Kerala, around 80 % of the tea bushes are over 40 years old Result? = low yields and deterioration in tea quality= low prices in foreign market.

Solutions?

Need to upgrade Tea estates through replanting, uprooting and cloning of high yielding varieties. But these solutions are expensive and time consuming. Therefore most tea estates prefer to maintain status quo. Thus production keeps declining with each year.

Land Ceiling Act

Single biggest reason for the slow growth in area under tea cultivation in India. Under this Act, the Government acquired large tracts of then uncultivated land from tea estates But Land Policy does not permit land with the government to be transferred to the corporate sector for cultivation. Small sized tea gardens =>no economies of scale, unaware of world supply-demand trends, cant invest in high yielding tea bushes/replanting etc. Therefore, such small farmers should be organized under a producer company / collective farming where each farmer has a shareholding in the producer company equivalent to his contribution to total tea sales. Government needs take proactive steps to

Collectivization

encourage ^this. High labour costs As per The Plantation Labour Act 1951, Tea companies need to provision under Plantation Labour Act implication for the tea estate owner

Maintain a minimum number of Salaries alone account for ~55% of employees pay certain operation cost (way higher than minimum wages Vietnam / Argentina) Provide other amenities to workers (housing, school etc) High cost of labour welfare. (compared to Sri lanka, Kenya)

Thus plantation labor act increases cost of production. Hence, tea estate cant afford replantation/cloning=lower yields every year. lets look at some more negative factors

RAINFALL

Erratic rainfall pattern causes frequent landslides in the hilly terrain, causing huge damage and heavy losses to the estates. During rainy season, even workers refuse to come due to fear of landslides. erratic and heavy rainfall=>soil erosion from hills=>fertility declined Hence farmers started using more chemical fertilizer=>harm to environment and long term yields of tea. over the years, urbanization + deforestation +

FERTILITY

POLLUTION

vehicular traffic=air pollution. negatively affecting tea-yields.

ROADS

Poor infrastructure, such as roads and bridges=> loss of workdays and a deterioration in the quality of the tea. In the Assam-Darjeeling region, the transportation of goods is highly time-consuming and costly because of the poor condition of the narrow roads during agitation for a separate Gorkhaland, when many tea estates were closed for indefinite periods Some mafia-type elements took advantage of the situation, unlawfully and forcibly occupying a portion of land on each estate=>area under teacultivation declined. Taxation

LAND MAFIA

TAX CENTER

tea plantation is subjected to

corporate tax tea cess, excise duty. Agricultural tax. Varying from 30% or even more. Purchase tax, employment & production cess. Tamilnadu removed tea from agricultural tax though. Other major tea growing states need to follow suit.

STATE

Unbranded, loose tea manufacturers at local level- they are not required to pay any taxes/excise duty/corporate tax or any other state-level levies. This leads to MRP price difference between branded and unbranded tea.

Branded Tea players see less demand= stretched financial condition= again, cant invest replantation of tea shrubs. Bought leaf factories

Bought leaf factories (BLF) have their own independent tea processing units But they donot own tea plantations, they procure leaf from small growers via auction centers. BLF factories are not subject to the plantation labour act or agricultural tax=> their operation cost is lower than tea estates. Exit

Initially, the fast-moving consumer goods (FMCG) companies like Tata tea and Hindustan Unilever bought tea plantations in Assam and Tamilnadu to bring down the cost of raw material. but both had negative experience due to ^above Upstream issues, so by 2005, they sold away plantations to former employees and other companies. Now Tata and Hindustan Unilever focus on blending, packaging and marketing only. Tea Auction

About 50% of world production continues to be traded via the auction mechanism.

Auction centres are located at all major producing countries, with the exception of China. In India, Tea Auction centres located at Guwahati, Siliguri, Cochin, Calcutta, Coonoor, Coimbatore and Amritsar. Guwahati = largest CTC tea auction centre in the world. Problem:= in auction, the brokers gulp down majority share. tea producer doesnt get fair share. Tea Supply Chain: Downstream

DESI CONSUMER

~90 of tea manufactured in India is of the CTC variety local demand for green tea= negligible But in foreign countries, the demand for green tea and non-CTC orthodox variety=high. Therefore, Indias export potential not fully

utilized.

YOUTH DEMAND

Among the Youth coffee and fruit juices perceived to be more contemporary and tea is regarded as an old fashioned drink= slight decline in demand.

PREMIUM

The premium tea (Expensive brands) = very small demand in India, not even 10% of total tea sales. Export related

leading exporters India, Sri Lanka, Kenya, Indonesia and China. lets check the issues

importers Russian Federation, UAE, Iraq, UK and Kazakhstan

LOW VALUE ADDITION

A significant proportion of Indias exports are in bulk form to UK, Netherlands. They blend our tea varieties, repack and reexport it to other countries @higher price. Kenya is emerging as a significant competitor it has ~65 % market share in Pakistan also penetrating in Iraq. Earlier, Indian producers had attuned their production to suit the requirements of the erstwhile USSR, given its dominance in consumption and imports. They did not focus on alternate markets.

KENYAN COMPETITION

Fall of USSR

but now USSR has collapsed and newly emerged CIS countries prefer to import cheaper tea from Sri-Lanka, Kenya, Bangladesh, Indonesia etc. Thus, our share in world tea export has declined. India has entered into Trade Agreements with Nepal and Sri Lanka, which have resulted in imports of tea from these countries into India. Indian tea sector already facing high competition from 1) loose unbranded tea @Domestic level 2)Kenya, China @foreign level. Hence Trade agreement with NepalSriLanka and subsequent competition from their tea players in Indian market=insult to injury.

TRADE AGREEMENTS

The combined negative effect of all of above upstream, downstream issues can be seen in following table: Indias % share in world export 1970 2011 tea another table: 2011 tea export in Rs. teas share in Indias cr. export 4000 less than 0.5% Indias % share in world tea-export 10% 33% 10%

Meaning: despite favorable agro-climatic conditions and cheap manpower, tea doesnt fetch us much export earnings. Foreign consumer Preference

BLACK TEA

~70% of global tea drinkers prefer black tea. Preferred in far east, Japan. Although its popularity is rising elsewhere, mainly due to its perceived health benefits. both Green tea and black tea are made from the same tea plant, Camellia sinensis Small demand, but much potential in US/Western Europe and other nontea drinker countries.

GREEN TEA

fruit/herbal tea, oolong tea, white tea, mint, chamomile, organic tea Future strategy

1. Government needs to streamline taxes, help estate owners to plant new shrubs. 2. In the traditional tea-drinker Western markets (i.e. UK, Ireland, Netherlands, Australia, New Zealand) strong growth in tea-demand is unlikely. Because their younger population is shifting towards Coffee. Tea is regarded as an oldfashioned drink. 3. Indian government + tea growers need to make marketing/awareness campaign about the health benefits of green/herbal/organic tea to create its demand in non-tea drinkers and youth abroad. Tea Board of India

1. Statutory body under the Ministry of Commerce. 2. The Board has members drawn from Parliament, tea producers, traders, brokers, consumers, and representatives of Governments from the principal tea producing states, and trade unions. 3. The Board is reconstituted every three years. 4. Provides Financial and technical assistance for cultivation, manufacture and marketing of tea. 5. helps plantation workers and their children through labour welfare schemes 6. Darjeeling Tea is given GI-status (Geographical indicator), Tea board coordinates with foreign agencies to see that it is strictly enforced. 7. Export Promotion 8. Data collection, analysis, R&D etc. Coffee: Scope/Significance

India is a small but competitive producer of coffee India is the fifth largest coffee producer in the world. The Indian cafe business is estimated at ~1500 crore rupees, and is expected to grow at more than 10% per year. Plantations are eco-friendly, also provide the perfect habitat for birds.

2011

export in Rs. cr.

%share in Indias export less than 0.5%

Indias % share in world export 2%

coffee 4500

(Source: Economic Survey 2012) Location Coffee growing regions in India can be grouped under three distinct categories:

Traditional areas Nontraditional North Eastern region

Southern states of Karnataka, Kerala and Tamil Nadu. Bababudangiris in Karnataka, known as the birthplace of coffee in India.

Andhra Pradesh and Orissa in the Eastern Ghats. Seven Sister states of Assam, Manipur, Meghalaya, Mizoram, Tripura, Nagaland and Arunachal Pradesh.

for more on location factors: refer the [Geography] article click me Two main coffee-varieties grown in India: ARABICA VARIETY ROBUSTA

In terms of % area under cultivation: TN leads Kerala leads. Higher cost of cultivation needs more labour less less

more susceptible to stem borer disease

less

Coffee Supply Chain: Upstream issues 1. Price of Coffee beans susceptible to fluctuations in international commodity market. Sometimes coffee farmer gets merely 5% of the final price. 2. Drought across the key coffee-growing regions of South India 3. Stem borer attack wiping out coffee plantations. Solutions? 1. Crop diversification. Apart from coffee, the planter should also start vanilla, cocoa, cinnamon, cashew , pepper, cardamom, cinnamon, medical and aromatic plants. (Depending on soil-climatic conditions). 2. Such crop diversification would ensure continued employment of the existing labour force without affecting the ecological balance. 3. Problem? = The state land ceiling acts do not permit reduction in acreage under coffee. They need to be amended especially for TN and Karnataka. labor

The labor laws for the plantation sector stipulate that any person who is employed for more than 90 days, needs to be treated as a permanent employee of the estate. And He must be given gratuity, housing, education, canteen facilities etc. Such labor laws impose an additional burden on the small coffee estate where labour is required seasonally. Further, coffee estate owners are moving to Robusta cultivation. Robusta variety needs less labour than Arabica.

(yet difficult to give VRS to redundant labourers because of the laws) Organic Coffee

Organic coffee is produced by using only non-synthetic nutrients and plant protection methods. (e.g. bio fertilizers and biopesticides). It has high demand in the health/environment conscious consumers of Europe, US and Japan. At present, biggest exporters of Organic coffee=Peru, Ethiopia and Mexico. And India has good potential for organic coffee production because:

1. Traditional farming practices such as use of cattle manure, composting, manual weeding etc., already done in vast majority of small holdings. 2. skilled manpower available for labour intensive operations like manual weeding, shade regulation and soil conservation measures etc. 3. Majority of these small holdings especially in Idukki zone of Kerala, Bodinayakanur zone of Tamil Nadu and all the tribal holdings in Andhra Pradesh and the North-Eastern states are already growing coffee using organic methods. Suggestions: 1. setup farmers collectives to ensure uniform quality. 2. Agricultural extension services with special focus on organic farming methods. 3. marketing abroad to showcase Indian coffees organic nature. Taxation Coffee growers are subjected to dual taxes

union

Income tax. Coffee retains better quality if cured immediately. But if coffee grower sells his coffee in cured form, he is subjected to income tax.=>It discourage the coffee grower from value addition or curing. they sell coffeebeans in unprocessed form=less income. Agriculture income tax. Karnataka has imposed purchase tax on coffee=>tax evasion by unregistered units, while honest grower suffers. This tax should be scrapped.

state

+Depreciation allowance should be provided on coffee plantations Coffee Supply Chain: Downstream

Majority population =tea drinker. Domestic coffee consumption mainly in South India: Tamil Nadu, Karnataka, Kerala and Andhra Pradesh + selected big cities. no. of outlets 11 32 100 1200 Annual Revenue in Rs. from EACH outlet (approx.) 1.5 crore 3.5 crore 60 lakh 40 lakh

coffee chains in India Tata-Starbucks Coffee Bean and Tea Leaf Costa Coffee Cafe Coffee Day

No, UPSC is not going to ask ^this, but Im providing the info to show that coffeeshop is also a good career backup option. Only challenge: real estate cost/rents in prime locations. Govt.Control

For long, the domestic and export market of coffee was administered and regulated by the Indian Coffee Board = typical inefficient marketing-distribution of a government agency. But Coffee export was liberalized in the 90s, Indian Coffee Boards monopoly was removed=export improved. But we were late to enter the game, Brazil, Columbia etc. already had captured the international business. The top Coffee MNCs made contract farming agreements with them and Indian coffee growers have been lagging behind ever since. Cess

Coffee exports are subject to a cess= makes our coffee expensive in foreign market. This export cess is pooled into the Consolidated Fund of India, BUT money not used for benefiting the coffee sector (i.e. for estate upgradation, R&D, HRD etc.) Government should either remove this cess or use its money for benefitting coffee sector. Coffee bars

Globally, the largest growth in coffee markets is driven by liquid coffee retailing through coffee bars and vending machines. E.g. Starbucks, Nescaf etc. Other coffee growing regions are also capitalizing on this trend by establishing their own brands of cafes in the major consuming regions. e.g. Juan Valdez, the icon of Colombian

coffee, has opened Juan Valdez coffee shops across the world. In such business environment, exporting coffee beans alone, wont bring lot of money. We also need to establish forward linkages e.g. Indian retail coffee bars abroad.

The combined negative effect of above Upstreamdownstream issues can be seen in this table: Indias % share in world coffee export 1970 2011 coffee 1% 2%

^as you can see very negligible rise in our export. (Source Economic Survey 2012) Foreign Marketing Indian coffee: Positive attributes 1. A large proportion of coffee in India is shade-grown= superior taste, 2. plantations are eco-friendly and provide the perfect habitat for birds 3. Use of agro-chemicals for coffee is minimal in India= Indian coffee is near-organic. Government + industrial associations need to make generic campaigns abroad, to highlight ^these positive attributes of Indian coffee.

Monsooned coffee

During monsoon season, Coffee beans swell because of the air-moisture. It gets a mellow yet unique taste. This is called Monsooned coffee. This variety is greatly appreciated by consumers in

Scandinavian countries. we should focus more on this variety + marketing campaigns abroad.

Although Japan and China are traditionally tea-drinking countries, coffee is establishing itself as an everyday beverage, among the youth= potential for Indian coffee exports. Coffee Board of India 1. Statutory body under Commerce Ministry. 2. Encourages the consumption of coffee in India and abroad. 3. participates in Coffee/Food and Beverages exhibitions in India and abroad 4. runs India Coffee Houses/Depots in the country. 5. provides quality control via testing laboratories 6. provides Market Intelligence & Statistical analysis to the industry 7. research related to the coffee trade including WTO issues Mock Questions

5m 1. Tea Board Of India 2. Coffee Board Of India 15m 1. Despite favorable agro-climatic factors and labour availability, Indias share in world coffee exports is negligible. Examine the upstream and downstream issues responsible for this and suggest remedies. 2. Despite favorable agro-climatic factors and labour availability, Indias share in world tea exports has declined considerably over the years. Examine the upstream and downstream issues responsible for this and suggest remedies.

Essay 1. Like fire, government is a dangerous servant and a fearful master. 2. To stimulate wildly weak and untrained minds is to play with mighty fires. 3. Liberty, when it begins to take root, is a plant of rapid growth. 4. An idea needs propagation as much as a plant needs watering.