By Dan Bolton
Tea is perishable. Smallholders that are not under contract to supply raw leaf to a local plantation regularly must wait in line at local bought-leaf factories hoping to get a reasonable price. The quality (and price) declines with each passing minute as the plucked leaves oxidize.
The Tea Board of India sets a minimum to prevent exploitation, but that price fluctuates. The January price per kilo, for example, is 23% lower than December, but the overall trend is upward, and that raises the possibility that smallholders will prosper.
Two positive Coved-19 related developments combined to raise CTC (cut, tear, curl) prices to an all-time high for the year, according to the Coonoor Tea Trade Association (CTTA). Total sales in 2020 rose to $115.2 million (INR846 crore) compared to $73 million during calendar 2019. In the north, the situation is quite different. The price at auction declined by INR60-100 in 2020, and production fell by an estimated 152 million kilos due to Covid-19 restrictions.
Indian Tea Association secretary-general Arijit Raha called the trends "very disturbing." A decline in tea consumption out-of-home significantly curtailed sales in the domestic market, and exports are also down.
Prosperous producers
In South India, plantations experienced similar restraints, but most tea is grown on small plots by farmers who raise several crops. The Tea Board’s monthly price threshold is based on all-India pricing at auction but varies by region. In December 2019, bought-leaf prices were fixed at INR12.45 per kilo. In December 2020, that threshold rose by INR10.85 per kilo, an 87% increase. In the Nilgiris this month, the average price of green leaf was INR23.26 per kilo, a considerable premium compared to previous years.
The impact has been immediate and beneficial. It takes four kilos of green leaf to make a kilo of finished tea, meaning factories are paying local farmers INR44 more per kilo of made tea. Smallholders pay more for fertilizer, plant-protection, and energy, and their cost of transport is higher than plantations, but hiring outside labor is minimal. If auction prices hold, factories that do not own plantations can incentivize locals to produce and deliver the higher quality leaf essential to making good tea.
In the past, factories paying top price for better quality raw leaves rarely got a return at auction, offsetting the higher costs.
The Kochi auction experienced a surge during the first week of January to INR158 per kilo. Prices at Coonoor averaged INR100 or more per kilo in every auction for six months, creating all-time highs in many weeks, and volume remained higher than last year as buyers from the north bid competitively for South India tea, according to CTTA.
“In 2020, many factories received prices unheard of since manufacturing started in their units,” according to a report in the Hindu Business Line.
In the final auction in December, Cross Hill Estate, the oldest bought leaf factory in the Kotagiri region, now celebrating its platinum jubilee, “topped the entire auction when its lots of broken orange pekoe small leaf grade sold for $3.97 (INR291) per kilo.” The significance is that smallholders now produce 50% of India’s tea. If smallholders can earn a decent living, failing plantations will sell off their land to pluckers' families, who will then operate like the Chinese who make a good living growing and selling tea.
While most of China's tea production (by volume) is now concentrated inland on large industrial plots of land, China's most valued tea is grown on small plots. Neighbors in the local markets pay a fair price driven by competitions that led to improved quality. Village winners set the price for the tea judged best by their peers each year. Out of respect, no other grower publicly charges more per kilo for the same style of tea. As a result, families engaged in tea production are well housed, educated, and mobile. Pluckers earn $40 per day. That is not the case in India, where pluckers earn $2 (INR137) per day.
Land reform
India’s government is aggressively reforming the agriculture sector despite the opposition of farmers and farm labor organizations. The Modi government has amended the Essential Commodities Act to remove the existing restrictions on stocking food produce. Second, it has introduced a new law — The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 or the FPTC Ordinance — to end the monopoly of the Agricultural Produce Market Committees (APMC) and allow anyone to purchase and sell agricultural produce. Third, another law — The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 or FAPAFS — has been enacted to legalize contract farming, so that big businesses and companies can cultivate vast swaths of land on contract.
Dharmaraj Narendranath, an independent tea consultant and a former chief executive of Harrisons Malayalam and a former president of the United Planters Association of Southern India, poses a different solution. In an article titled, Brewing New Ideas to Sustain the Tea Sector, he writes that “the industry, in general, is in crying need to have a structural change in the way it operates. One way of ensuring holistic sustainability of the plantation industry would appear to be to distribute land-ownership in favor of the plantation employees and buy back the raw material through a co-operative outfit.”
“Once the workmen become owners of land and cease to be plantation employees, it will be incumbent on the government to provide them with social and welfare amenities, currently provided by the plantation management, through their various existing schemes. This will further bring down production costs for the corporates. The government can thus ensure complete social and welfare care for this populace — which may not quite be the case now. Such a proposal could also be used to negotiate a trade-off with the government, with respect to the use of a certain percentage of land for independent-use by the corporate, without any strictures whatsoever from the government in terms of its use (this freedom currently is not available to plantation companies).
He suggests “basing green leaf purchases on a price-formula linked to, say, the published industry auction price. Individual corporates may want to pay a higher price, based on their end price realization (as is being done in the case of bought leaf purchases)."
The workmen will have the social and financial security net of owning land, with an assured buyback arrangement for the crop. They will also be able to build a house, by themselves or through government schemes.
Ultimately disinvestment of plantations will enable corporations to insulate themselves from the wage increase cycle, and it would link their raw material cost to their end price realization, writes Narendranath.
“A win-win for all and therefore a truly sustainable and transparent model — a key requirement for a highly labor-centric industry like plantations,” he concludes.