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Food Processing] Tea, Coffee Supply Chain, Upstream,Downstream for UPSC General Studies Mains

1.Prologue

2.Tea: Scope Significance1.Tea Supply Chain: Upstream2.Tea Supply Chain: Downstream3.Tea Board of India

3.Coffee: Scope/Significance

1.Coffee Supply Chain: Upstream issues2.Coffee Supply Chain: Downstream

3.Coffee Board of India4.Mock Questions

Prologue

Although I had planned this to be the last article under [Foodprocessing] but heavy-rainfall in Gujarat randomly shuttingdown my landline internet and electricity, hence couldntwork 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 in world (2012, as per Teaboard)

production 2

consumption 2

export 4

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A tea plant is most productive between 15 and 35 years ofits planting.

Yields of tea usually drop after 50 years. Tea gardens inDarjeeling are about 80-100 years old.

In Kerala, around 80 % of the tea bushes are over 40 yearsold

Result? = low yields and deterioration in tea quality= lowprices in foreign market.

Solutions?

Need to upgrade Tea estates through replanting, uprootingand 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 thegovernment to be transferred to the corporate

sector for cultivation.

Collectivization

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 beorganized 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

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encourage this.

High labour costs

As per The Plantation Labour Act 1951, Tea companies need to

provision under Plantation

Labour Actimplication for the tea estate owner

Maintain a minimum number of

employees pay certain

minimum wages

Salaries alone account for ~55% of

operation cost (way higher than

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, teaestate 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.

FERTILITY

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.

POLLUTION over the years, urbanization + deforestation +

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Unbranded, loose tea manufacturers at local level- they arenot required to pay any taxes/excise duty/corporate tax orany other state-level levies.

This leads to MRP price difference between branded and

unbranded tea.

Branded Tea players see less demand= stretched financialcondition= again, cant invest replantation of tea shrubs.

Bought leaf factories

Bought leaf factories (BLF) have their own independent teaprocessing units

But they donot own tea plantations, they procure leaf fromsmall growers via auction centers.

BLF factories are not subject to the plantation labour act oragricultural tax=> their operation cost is lower than teaestates.

Exit

Initially, the fast-moving consumer goods (FMCG)

companies like Tata tea and Hindustan Unilever bought teaplantations in Assam and Tamilnadu to bring down the costof raw material.

but both had negative experience due to ^above Upstreamissues, so by 2005, they sold away plantations to formeremployees 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 viathe auction mechanism.

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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 CTCvariety

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

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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 hasdeclined.

TRADEAGREEMENTS

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 Nepal-

SriLanka and subsequent competition from

their tea players in Indian market=insult toinjury.

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 33% 10%

another table:

2011export in Rs.

cr.

teas share in Indias

export

Indias % share in world

tea-export

tea 4000 less than 0.5% 10%

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Meaning: despite favorable agro-climatic conditions and cheapmanpower, tea doesnt fetch us much export earnings.

Foreign consumer Preference

BLACK TEA ~70% of global tea drinkers prefer

black tea.

GREEN 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

fruit/herbal tea, oolong tea,

white tea, mint, chamomile,

organic tea

Small demand, but much potential in

US/Western Europe and other non-

tea drinker countries.

Future strategy

1. Government needs to streamline taxes, help estate ownersto plant new shrubs.

2. In the traditional tea-drinker Western markets (i.e. UK,Ireland, Netherlands, Australia, New Zealand) strong growthin tea-demand is unlikely. Because their younger populationis shifting towards Coffee. Tea is regarded as an old-fashioned drink.

3. Indian government + tea growers need to makemarketing/awareness campaign about the health benefits ofgreen/herbal/organic tea to create its demand in non-teadrinkers and youth abroad.

Tea Board of India

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1. Statutory body under the Ministry of Commerce.2. The Board has members drawn from Parliament, tea

producers, traders, brokers, consumers, and representativesof 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 schemes6. Darjeeling Tea is given GI-status (Geographical indicator),

Tea board coordinates with foreign agencies to see that it is

strictly enforced.7. Export Promotion8. 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.

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2011export in Rs.

cr.

%share in Indias

export

Indias % share in world

export

coffee 4500 less than 0.5% 2%

(Source: Economic Survey 2012)

Location

Coffee growing regions in India can be grouped under threedistinct categories:

Traditional

areas

Southern states of Karnataka, Kerala and TamilNadu.

Bababudangiris in Karnataka, known as thebirthplace of coffee in India.

Non-

traditionalAndhra Pradesh and Orissa in the Eastern Ghats.

North Eastern

region

Seven Sister states of Assam, Manipur, Meghalaya,

Mizoram, Tripura, Nagaland and Arunachal Pradesh.

for more on location factors: refer the [Geography] articleclick 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 less

needs more labour less

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more susceptible to stem borer disease less

Coffee Supply Chain: Upstream issues

1. Price of Coffee beans susceptible to fluctuations ininternational commodity market. Sometimes coffee farmergets merely 5% of the final price.

2. Drought across the key coffee-growing regions of SouthIndia

3. Stem borer attack wiping out coffee plantations.

Solutions?

1. Crop diversification. Apart from coffee, the planter shouldalso start vanilla, cocoa, cinnamon, cashew , pepper,cardamom, cinnamon, medical and aromaticplants. (Depending on soil-climatic conditions).

2. Such crop diversification would ensure continuedemployment of the existing labour force without affecting theecological balance.

3. Problem? = The state land ceiling acts do not permitreduction in acreage under coffee. They need to beamended especially for TN and Karnataka.

labor

The labor laws for the plantation sector stipulate that anyperson who is employed for more than 90 days, needs to betreated as a permanent employee of the estate. And He

must be given gratuity, housing, education, canteen facilitiesetc. 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.

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(yet difficult to give VRS to redundant labourers because ofthe laws)

Organic Coffee

Organic coffee is produced by using only non-syntheticnutrients and plant protection methods. (e.g. bio fertilizersand biopesticides).

It has high demand in the health/environment consciousconsumers of Europe, US and Japan.

At present, biggest exporters of Organic coffee=Peru,Ethiopia and Mexico. And India has good potential fororganic coffee production because:

1. Traditional farming practices such as use of cattle manure,composting, manual weeding etc., already done in vastmajority of small holdings.

2. skilled manpower available for labour intensive operationslike manual weeding, shade regulation and soil conservationmeasures etc.

3. Majority of these small holdings especially in Idukki zone of

Kerala, Bodinayakanur zone of Tamil Nadu and all the tribalholdings in Andhra Pradesh and the North-Eastern statesare 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 organicnature.

Taxation

Coffee growers are subjected to dual taxes

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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 inunprocessed form=less income.

state

Agriculture income tax. Karnataka has imposed purchase

tax on coffee=>tax evasion by unregistered units, while

honest grower suffers. This tax should be scrapped.

+Depreciation allowance should be provided on coffeeplantations

Coffee Supply Chain: Downstream

Majority population =tea drinker. Domestic coffeeconsumption mainly in South India: Tamil Nadu, Karnataka,Kerala and Andhra Pradesh + selected big cities.

coffee chains in

India

no. of

outlets

Annual Revenue in Rs. from EACH

outlet (approx.)

Tata-Starbucks 11 1.5 crore

Coffee Bean and

Tea Leaf32 3.5 crore

Costa Coffee 100 60 lakh

Cafe Coffee Day 1200 40 lakh

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

Govt.Control

For long, the domestic and export market of coffee wasadministered and regulated by the Indian Coffee Board =typical inefficient marketing-distribution of a governmentagency.

But Coffee export was liberalized in the 90s, Indian CoffeeBoards monopoly was removed=export improved. But wewere late to enter the game, Brazil, Columbia etc. already

had captured the international business. The top CoffeeMNCs made contract farming agreements with them andIndian coffee growers have been lagging behind ever since.

Cess

Coffee exports are subject to a cess= makes our coffeeexpensive in foreign market.

This export cess is pooled into the Consolidated Fund ofIndia, 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 moneyfor benefitting coffee sector.

Coffee bars

Globally, the largest growth in coffee markets is driven by

liquid coffee retailing through coffee bars and vendingmachines. E.g. Starbucks, Nescaf etc. Other coffee growing regions are also capitalizing on this

trend by establishing their own brands of cafes in the majorconsuming regions. e.g. Juan Valdez, the icon of Colombian

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coffee, has opened Juan Valdez coffee shops across theworld.

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 Upstream-downstreamissues 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. (SourceEconomic 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 birds3. Use of agro-chemicals for coffee is minimal in India= Indian

coffee is near-organic.

Government + industrial associations need to make genericcampaigns abroad, to highlight ^these positive attributes of Indiancoffee.

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

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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 theyouth= 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 inIndia and abroad

4. runs India Coffee Houses/Depots in the country.5. provides quality control via testing laboratories6. provides Market Intelligence & Statistical analysis to the

industry7. research related to the coffee trade including WTO issues

Mock Questions 5m

1. Tea Board Of India2. Coffee Board Of India

15m1. Despite favorable agro-climatic factors and labour

availability, Indias share in world coffee exports isnegligible. 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 hasdeclined considerably over the years. Examine theupstream and downstream issues responsible for thisand suggest remedies.

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Essay1. 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.