By Heather Connon
Key players in the tea industry come together to deal with climate change issues, rival crops and changing patterns of consumption. Heather Connon reports.
A nice cup of tea is the usual prescription for everything from severe shock to a tiring day. But the industry behind the restorative cuppa is facing some challenges of its own, which, if not addressed, could have a dramatic impact on the supply chain behind the world's favourite drink.
Climate change, urbanisation, the growing affluence of emerging economies and the attractions of alternative crops like biofuels are having an effect on the viability and costs of all types of agriculture and industry. Other issues - like the dynamics of the plantation system under which a large proportion of tea is produced, and changing consumption patterns in its core markets - are specific to tea. In combination, they pose a significant challenge to all three parts of the supply chain: growers, packagers and retailers.
In 2009 a drought in Kenya, the world's third largest tea producer, caused a 30% drop in production in the Rift Valley. Modelling of possible climate change impacts, commissioned by the Ethical Tea Partnership, indicates that large swathes of the country's tea-growing areas could become marginal by 2030. Other models predict that Darjeeling production could fall by between 40-80% over the same period. And if the global temperature continues to rise, tea production in Uganda will be restricted to mountains and hillsides. In addition, crops seen as more lucrative are increasingly replacing tea in some of its core areas. In Sri Lanka, for example, 13,000 hectares - close to a 10th of the total used for tea cultivation - was converted to crops like rubber, palm oil and fruit in the five years to 2010.
There are issues with the overheads too. Labour is the main expense for the tea industry, typically accounting for between one half and three-quarters of total costs. Although wages remain low (in many tea-producing areas, workers are starting to shun tea estates in favour of jobs elsewhere) a large proportion of tea is still grown on big plantations, set up in colonial times. The owners are required to provide facilities like hospitals and schools for their workers, costly services which limit their ability to increase wage levels. All stages of the tea production process are also energy intensive - in some cases it can use three times the energy of producing the same weight of steel. And as energy costs rise, so does the financial pressure on tea producers.
As Dan Crossley, Executive Director of the Food Ethics Council, warns: "If the tea industry does not wake up to the serious issues hitting it, it will face severe supply shortages, cost increases and competition from other drinks."
The industry is already addressing many of these challenges. It is now six years since Unilever, one of the world's biggest tea companies, said it would source all its tea using the sustainability standards of the Rainforest Alliance, under which farmers must commit to improvements in worker welfare, farm management and environmental protection; and more than 25 years since the Ethical Tea Partnership (ETP) was established by a number of large tea companies to monitor their supply chains. Since then, the ETP has engaged in a wide range of projects, from helping Kenyan farmers adapt to climate change to promoting the interests of women, who form the majority of tea workers. It also offers training programmes to help producers with key problems, such as factory health and safety, use of agrochemicals, and environmental management, including biodiversity.
Sarah Roberts, ETP's Chief Executive, believes the plantation model is "hard to sustain" in the long term. Scale is a factor: encouraging smallholding should enable more of the value in tea to be retained locally. But there can also be significant challenges for smallholders, she adds, as they need to invest in maintaining and improving the crop, in the environment, marketing and labour. Currently, their returns are only half as much as plantations achieve.
Jordy van Honk, Senior Project Manager for tea at IDH, the Sustainable Trade Initiative, thinks that helping smallholders improve is crucial to the future of the tea industry. "Without action we will certainly see many smallholder producers living in poverty", he says. "In general they have very limited access to extension services and inputs such as fertiliser and finance. At the same time these producers have become more important to secure tea supply for the future."
Kenya, which accounts for just under 9% of global production, has already provided one model of how smallholders can prosper. They are organised into an extremely effective group, the Kenya Tea Development Agency (KTDA), which represents almost 500,000 small-scale farmers, producing over 60% of Kenya's tea. The agency manages more than 60 tea factories, and also invests prudently to secure its members' financial future. In fact the KTDA model has proved so successful that Rwanda has sought the organisation's help to convert some of its own state-owned plantations into smallholdings.
And what of climate change? Is the industry preparing to adapt? According to Roberts, "Producers are thinking ahead, looking for more drought-resistant plants, managing water more effectively and considering where tea is grown." Indeed, some producers are moving production to higher levels, where drought is less of an issue. But Michael Pennant-Jones, Group Sustainability Manager at tea producer Finlays, says issues like soil erosion and the distribution of rainfall still pose a significant threat to production. "The question is, can we mitigate the effects and adapt our operations to it?"
Tea remains a very fragmented industry, making it hard for its key players to present a 'cohesive voice' on sustainability issues. Recognising the need for one, Pennant-Jones joined a new consortium convened by Forum for the Future, Tea 2030. It explores what a sustainable tea sector could look like in future, and brings together two of the world's biggest tea buyers, Tata and Unilever - owners of Tetley and PG Tips respectively - as well as Finlays, ETP, Fairtrade and IDH. Pennant-Jones makes the point that although there are some big tea companies, no single organisation has more than a 10% market share, and growers, packers and retailers all having different interests to pursue - adding to the case for Tea 2030.
"Finlays can clearly have an impact on the local environment and on our immediate business", he says. "But to have a big impact [on the industry] you need to work with others. For example, if we change to a revolutionary packaging system on our own, it probably won't work. We alone do not have the leverage to introduce it across the industry, so retailers may not be interested in supporting the changes."
So far, this influential group has identified 19 key issues, from the fact that China is reducing its exports as domestic consumption increases to the use of pesticides and other chemicals. Ann-Marie Brouder, Principal Sustainability Adviser at Forum for the Future, says one goal of the project is to define guiding principles which will help the tea industry address sustainability and long-term planning challenges. "We want producers to look at the guidelines and be able to say, 'This is the expected scenario for my industry and this is how I can deal with it.'"
Opinions on the best way of selling tea also vary across the industry. Unlike coffee, grains and other agricultural products, trading of tea is still largely done at regular auctions rather than through the market. Specifying prices, quality and quantities in advance would ensure retailers have the quantity and quality of tea they require. A move to that system has been under discussion for decades, and seriously considered twice but, so far, no changes have been made.
Some tea experts believe that, as China and India export less, and supplies from elsewhere are restricted by climate change and competition from other crops, tea will have to move towards long-term supply contracts. These would also give producers certainty about the price and volumes of tea they could potentially sell, which should in turn encourage them to make longer-term investments. However, speculation by market traders has made the prices of other commodities traded on the market more volatile.
The tea industry could also emulate coffee in another way, by producing more upmarket, speciality teas to encourage consumption by younger, more affluent consumers. Although there are some bespoke tea shops, Forum for the Future's Brouder points out, there are as yet no chains to rival the likes of Starbucks or Costa Coffee - another possible avenue for the tea industry to explore. Clearly, to make the most of these opportunities and minimise the risks, there needs to be some sort of consensus on the future of the industry, and this is the goal Tea 2030 means to reach.
Heather Connon is a freelance journalist specialising in finance and investment.
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