The Cost of Sustainable Tea

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By Anne-Marie Hardie

As Sri Lanka reached its peak cost of tea production Ceylon’s fabled orthodox teas earned a top price of $US3.81 per kilo in 2013. Unfortunately these higher prices were not sustained. By November 2014 the price per kilo dropped to $3.35 and by March 2015 the all-elevation average was $3.23 (SLRs 420.21) compared to the average $3.66 per kilo paid in 2014.

The Colombo Tea Auction performed better than all other auction centers globally in 2014 but falling oil prices and political upheaval in Russia compounded the glut of global tea. As a result exports declined by 5.9% for the period January through June 2015.

“It is imperative at this juncture that Sri Lanka look for new markets to export tea rather than being solely dependent on Russia and Middle Eastern countries already in crisis,” according to an analysis by the Sri Lanka Tea Board in its quarterly Tea Market Update.

The challenge for Sri Lanka, according to Dilhan C. Fernando, director of Dilmah Tea, will be to maintain, nurture, and enhance both the appeal and value of Sri Lanka’s fabled Ceylon tea. Dilmah employs 31,500 workers and exports tea to 100 countries, making it one of the world’s largest tea companies.

“Ceylon tea has unrivalled potential today, having the benefit of diversity in relation to the different terroirs… that are influenced by topology, climate and in particular the monsoonal conditions to produce dramatically different teas,” said Fernando. “This diversity complements the quality of Ceylon tea, the seasonal phenomenon from Uva and Dimbula as well as the conservative agricultural practices.”

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Low grown tea receives the highest prices at auction, followed by high grown and then mid. Colombo auction prices overall remain higher than the global average, in part due to the high cost of production and limited supply of high-quality orthodox tea. The Middle East, North Africa, and Russia contract for 90% of exports, demand that has elevated Sri Lanka to the world’s largest exporter of quality whole leaf black tea.

“These higher prices have been sustained thus far but could be at risk if a concerted effort is not made to rebuild the premium, aspirational position of Ceylon tea, highlighting its superiority to other origins,” said Premala Srikantha, director (promotion) Sri Lanka Tea Board.

Brand recognition continues to be a challenge, according to David De Candia, an American tea buyer, who serves as ambassador for Ceylon Tea in the US and Canada. De Candia is senior director of tea at Coffee Bean & Tea Leaf, a 1,000-store global coffee and tea chain based in Camarillo, Calif.

“When the country changed its name from Ceylon to Sri Lanka it lost the connection to the type of tea because the tea is Ceylon,” said De Candia. He said that bridging this gap is one of his primary goals as ambassador.

Originally a British colony, Ceylon declared its independence in 1948 but retained the British name of Ceylon until 1972 when Sri Lanka became a republic. Despite the name change, Sri Lankan grown tea is still known by its original Ceylon name.

Concerned about developing new markets, in November 2012 Sri Lanka began taxing exports to amass a fund sufficient to finance a global marketing campaign. The fund now exceeds $50 million and provides up to $1 million in matching funds for tea companies targeting Europe, Asia, and North America.

Polishing the Ceylon brand is integral to ensure that Ceylon tea is recognized for the high quality tea that it is, said Fernando. “The reputation of Ceylon tea has been misused by many brands initially to establish themselves and thereafter to profit without regard to the founding values and commitment,” said Fernando. “Most of the world’s major tea brands today were established on a foundation of Ceylon tea but retain nominal if any Ceylon tea content today as they have moved on to reduce cost by using tea from other origins,” he said.

Dilmah is committed to offering single origin, unblended Ceylon tea. “We encourage Ceylon tea growers to implement the sustainability, biodiversity, quality, ethical and other priorities that are necessary but at the same time to secure for Sri Lanka the benefit of those by establishing their own brands,” said Fernando, adding, “It is a difficult proposition today although not an insurmountable one.”

Export targets

De Candia was appointed for his expertise and passion for Ceylon tea. Sri Lanka imports to the US grew 23% from 2012 to 2013. The US is the world’s largest economy and still the “undisputed trendsetter to the world on food and beverage sector, service sector and most other sectors,” according to Janaki Kuruppu, the first woman to chair the Sri Lanka Tea Board.

The US is the fourth largest tea importing country. Canadian consumption is expected to increase 40% by 2020. Both countries prize specialty and value-added tea, said Kuruppu who intends to target the “iced tea” segment consumed by 8 in 10 Americans.

Last year the tea board also appointed Michael Bunston OBE, tea ambassador to the UK. Bunston chaired the International Tea Committee for 19 years. He is tasked with burnishing the brand in Europe. Increased outlays for advertising, trade missions and an upgrade to the Sri Lanka Tea Board website (www.pureceylontea.com) are underway.

Quality has a price

Despite the high price at auction, some estates still operate at a loss. Sri Lankan tea is grown on steep slopes and hand plucked which means yields are low and mechanization is not an option. The plant stock is aged. The cost of tea production rose from $1.35 per kilo in 2005 to $3.10 in 2013. Production increased 11% during the decade, but the cost of production rose 159%.

The tea industry, directly and indirectly, employs a million workers with women comprising 75% to 85% of field labor. Labor accounts for 60% of the cost of production which was estimated at $2.72 to $2.89 per kilo (SLRs 360 to SLRs 380) prior to the latest wage increase. Wages rose 25% in 2011 to $4.70 per day and in April 2013 were increased 18.4% over a two-year agreement that expires this year. Workers are seeking an increase to $7.50 (SLRs 1000).

The basic wage is now $4.80 (SLRs 650) with incentives that exceed $5 per day, making it one of the highest in the world.

“This is a good thing, we want that, but unfortunately the price of tea isn’t increasing at the same rate,” said Marc Monsarrat, senior manager of the Tea Program at Rainforest Alliance. “What we find is that some of the estates are struggling with the cost of production.”

At Lumbini Estates in southern Sri Lanka owner Dayapala Jayawardana processes 12,000 kilos of tea daily at a factory awarded many certifications for efficiency in producing prize-winning tea. Lumbini mainly produces black tea but is getting record prices ($580 a kilo) for specialty grades. The company strategy is to recover its higher cost of production by selling higher priced specialty teas in export markets. To do so the estate launched the Ladaluchakra brand, named Sri Lanka’s most innovative tea, and the patented Jayachakra line, which was well received in Japan, said Chaminda Jayawardane, c.e.o. In 2009 Japanese buyers paid 26,000 yen ($325) per kilo for this tea.

Lumbini invests a lot of time and money developing the right attitude and skills, he said. “Our vision is to be the best tea manufacturer in Sri Lanka and we achieved it with team work,” he said.

In addition to a minimum wage, the Sri Lankan government also mandates education and has prohibited child labor. As a direct result, the literacy rate of estate workers’ children at Walter’s Bay is now one of the highest in the tea industry, said Christian Weber, vp of sales.

Weber believes that sellers at auction should ask for even more. “Sri Lanka, as far as we can tell, has some of the highest standards when it comes to the social welfare of the workers in the tea plantations,” said Weber.

“When you get tea from Sri Lanka you are paying more, but you are getting a better product. First of all, you are getting a guarantee that there is a minimum standard of living for the workers. “Increased awareness of both Sri Lanka’s sustainability efforts and the quality of the tea are necessary to ensure that these higher prices are maintained,” he said.

Sri Lanka is committed to producing 100% orthodox, Ceylon tea but most is sold in bulk. Only 5% of exports by volume are high-value tea. This is largely because 70% of Sri Lanka’s tea is produced by smallholders. These small farms, usually fewer than 20 acres (10 hectares), are often family-owned or small operations with a few field workers.

There are incentives to produce good tea. The law requires that small holders be paid at least 58% of the net sales average of the factories. If tea prices increase, then the workers will in turn receive more money.

Connecting wages to price works well, said Weber, noting that Walter’s Bay often pays more than the required minimum. He said that while smallholders receive enough to maintain a reasonable quality life, more is needed.

With four processing factories throughout Sri Lanka, Walter’s Bay processes tea grown on their own garden and also those from small holders. These “bought leaf” tea factories work directly with local smallholders.

In 2013, Walter’s Bay began a Growers Empowerment Program (GEP) to further enhance the livelihood of these small holder farmers. The GEP supports smallholders beyond the minimum. For example, Walter’s Bay owns one of the larger nurseries and often provides the farmers with new plants, plucking baskets and the assistance of field agronomists to help them get better yields.

“We look at the system as a long term strategy where we can help farmers earn a better living, and make more money, in turn we get better leaf and we can make more money,” said Weber.

According to De Candia, one of the key benefits of caring for the tea growers is that that attention will transfer to the product. “When you build from within like that, the product is going to come out good and consistent because you are taking care of your estate workers,” said De Candia. “You have to do that; you can’t neglect that because I think your product will show it at the end of the day.”

Fernando hopes that increased awareness of Ceylon tea will align the industry’s principles of sustainability with consumers. In the last five years, the Sri Lankan tea industry has placed a strong emphasis on conservative agricultural practices, including building environmentally responsive practices and strict controls over the use of chemicals, making it the cleanest tea in the world.

“This gives Ceylon tea unique appeal amongst consumers,” said Fernando. “However it requires more concerted effort in relation to enhancing productivity both to agricultural practices such as replanting, wider adoption of sustainable agricultural practices and soil management.”