TED Case Studies

India Tea and Environment



     CASE NUMBER:        260
     CASE MNEMONIC:      INDIATEA
     CASE NAME:          India Tea and Environment

A.   IDENTIFICATION

1.   The Issue

     India has the distinction of producing both the highest and
lowest quality teas: the famed Darjeeling as well as the generic
ctc (cut-tear-curl), a nondescript blend used in teas.  The best of
India's prize Darjeeling is considered the world's finest tea, and
almost all of it is exported.  However, India, the world's largest
tea producer is facing rising competition in the world tea market.
Sri Lanka another major tea producer and strong competitor of  the
Indian tea market faces similar problems.  Tea, in these countries
is currently on a downward trend with reduced demand followed by an
overabundance of tea. Tea prices have been falling worldwide
because of an oversupply in production.  While world market prices
in real terms have declined, the cost of production has increased
steadily, cutting producers costs.  Moreover, big buyers like
Russia, Iran and Iraq have become inactive due to political
reasons.  Changing consumption patterns have also contributed to
the decline in tea prices.  Despite, Sri Lanka's concerns over the
tea market, the country has also gained momentum over India in the
tea market. Sri Lanka sold 27 million kilograms of tea to the
Commonwealth of Independent States to Russian buyers where recent
sales of Indian teas have been poor. Moreover, Sri Lankans sold
their teas to Russians at a low price of 1.5 US dollars a kilogram
during the last three quarters of 1993 while the price of most
north Indian teas was over 2 U.S. dollars per kilogram.

2.   Description

Rising competition from African countries as Kenya, also threatens
India where production in teas is new and expanding.  As a result
of these changes in the world tea market, seven of the world's
leading tea producers met in Colombo, Sri Lanka in April of this
year.  The meeting promoted by both India and Sri Lanka included
senior officials from the countries of India, Sri Lanka,
Bangladesh, China, Iran, Indonesia and Malawi.  The goal of this
meeting was to lay the framework for a joint producers' association
and to find the solutions to the fall in world tea prices.

According to Athauda Seneviratne, Sri Lanka's Deputy Minister of
Public Administration,  The economic agenda involved in the
production and marketing of tea is markedly different now compared
to the 1970's and 1980's. A collective approach to tea production
and promotion would eventually result in increased profits and
reduced costs to all the producers. Forbes and Walker, analysts for
weekly tea reports indicate, the price of tea has fallen from
around $2.25 per kg in 1970 to almost $1.25 in 1994.

An important obstacle to the negotiation of a new international
agreement is the divergence of views between the large, long
established producers and the newer exporting countries.  The
former do not wish to reduce their export volumes, while the latter
add to the total in amounts larger than the market can handle.
Industry analysts state, a drop in the tea export volumes of India
and Sri Lanka could be advantageous to the smaller producers; in
combination of a slowdown in the growth rate of tea production by
thoen these countries could have an affect on the amount of tea
exported/imported to various parts of the globe.  The formation of
a tea cartel, along with new standards and regulations would also
impact production costs, delivery costs  and the ultimate price of
tea.

Developing countries in South Asia and East Africa account for more
than 85 percent of world tea production and exports. India and Sri
Lanka are dominant in both.  Developed countries account for about
62 percent of world tea imports. The larger importers include the
UK, US, Netherlands, Australia, Canada, Japan, South Africa,
Ireland and the former Soviet Union.

Since 1970 India has become the largest absolute consumer of tea. 
In 1971-73 it accounted for 22 percent of total world consumption,
compared with the United Kingdom's 18 percent.  For the United
Kingdom, both absolute and per capita consumption has been
declining over the past two decades, reflecting the diversification
of tastes in favor of coffee (particularly instant coffee) and soft
drinks.  By contrast, the US consumption shows a continuous rising
trend, reflecting the increased popularity of iced tea.

Shifts in the composition of demand for tea in the developed
importing countries have had unfavorable effects on aggregate
export earnings from tea.  The increasing use of tea bags and
soluble instant tea effectively reduces the quantity of tea needed
per cup and also raises the demand for plain cheaper tea at the
expense of those of high quality. Tea bags account for about 10
percent of the volume of world consumption.  Factors that seem to
have stimulated consumption of instant tea include its ease of use
as a cold drink and the growing prevalence of vending machines.  It
is these changes in the consumption patterns of tea which
contribute to the decline in tea prices.  Although many
industrialized countries are drinking less tea, developing nations
increasingly demand  the beverage (Middle East, Asia, former Soviet
Bloc), yet do not have the hard currency to pay for it.

The international market price of tea is determined at major
auctions in centers such as Calcutta, Colombo, and London.  The UK
has historically held about 50 percent of world tea stocks, the
remainder being held by producing countries.  Since Britain is the
largest tea importer, London provides the leading price indicator
in the world market. Also affecting tea prices has been the
collapse of the Soviet Union, a major market for Indian exports.
Because the former Soviet bloc countries have mostly withdrawn from
the tea market due to hard-currency shortages tea prices have been
forced downward.  In 1991, the average price of tea in London fell
from 1990's 114 pence/kg to 105 pence.  Furthermore, the price
premium that Indian and Sri Lankan teas commanded in the early
1950's has gradually been eroded through the quality of improved
African teas.

The credit for creating India's vast tea empire goes to the
British, who discovered tea in India and cultivated and consumed it
in enormous quantities between the early 1800's and India's
independence from Great Britain in 1947.  The Scottish adventurer,
Robert Bruce, discovered tea plants growing in Assam in the 1820's. 
At this time, no one thought that tea existed in India, however
Major Bruce discovered the plants growing wild in the jungles
controlled by the tribal chiefs.  The British East India Company's
monopoly in China ended in 1832 and it became necessary to find
other sources to supply the English consumers of tea.  In 1834, a
tea committee was appointed to investigate the possibility of
cultivating tea in India.  After a thorough investigation and study
of the crop, the first commercial batch of tea ever produced
outside of China came from Assam in 1839.  The first contract for
Indian teas between 500 and 1,000 chests was issued by London
brokers at that time.

Two of India's major teas are the Darjeeling and the Assam. 
India’s famed Darjeeling is named after the summer capital of the
Government of Bengal,  where tea is cultivated at altitudes of
4,000-10,000 feet in the Darjeeling hills. India's other major tea,
Assam is named for the district in which it is grown, which lies in
northeast India along the border between India and Burma.  This
region produced more black tea than any other area in the world,
with the exception of some parts of China.  Assam tea which is
strong, dark and rich is a component of many standard blends,
including Irish Breakfast.

India has over 13,000 tea estates with a combined acreage of about
one million, most of it in northern India. The sector employs close
to one and a half million people with foreign participation in the
majority of tea plantations at 25-30%.  Until recently, no company
in India was allowed to be majority owned by overseas stockholders.

Despite India's historical success with the tea industry, in recent
years, Indian teas have faced serious competition in the
international market.  The UK now imports tea cheaper from Kenya
and Malawi. To combat some of these challenges advertisers have
made efforts toward building marketing campaigns in order to boost
the tea market.  Some efforts have even been made to promote tea
like Coca Cola. Yet despite these efforts, tea producers in India
continue to face serious challenges:  how to keep quality,
production, and exports up without driving prices down.

                           Table 260-1
         Average Tea Production, by Region and Country,
                 and Shares of World Total, 1990

Country        Production*    Annual % share      % Change in Prod.

China               27             4.2            2.3
India               451            2.4            39.2
Indonesia           51             .8             4.4
Iran                22             8.5            1.9
Sri Lanka           214            1.3            3.6
Kenya               49             10.4           4.3
Malawi              21             5.2            1.8 
Uganda              21             12.9           1.8       

FAO, Tea Statistics; FAO Production Yearbook; and FAO Monthly
Bulletin of Agriculture Statistics

*  Thousands of Metric Tons

3.   Related Cases

     COFFEE case
     EVER case
     MALAY case
     INDONES case
     SUGAR case

     Keyword Clusters    
     (1): Product                  = TEA
     (2): Bio-geography            = TROPical
     (3): Environmental Problem    = DEFORestation

4.   Draft Author:       Beryl Kim

B.        LEGAL CLUSTER

5.   Discourse and Status: AGRee and ALLEGation

Senior officials from India, Sri Lanka, Bangladesh, China, Iran,
Indonesia and Malawi were the participants in a joint tea producers
association to meet the challenges occurring from a sharp fall in
world tea prices.
  
6.   Forum and Scope: INDIA and UNILATeral

7.   Decision Breadth: 7

The meeting focused on evolving joint action in research sharing of
information, standardization of packaging and export products.  The
main focus between these countries was to form a common forum to
discuss problems faced by tea producers,     similar to the
Organization of Petroleum Exporting Countries (OPEC).

(India, Sri Lanka, Bangladesh, China, Iran, Indonesia, and Malawi)

8.   Legal Standing: LAW

As of yet, no formal agreements have been made between these
countries.  Official talks have taken place in July 1994, between
India and Sri Lanka regarding the sharp drop in tea prices. 
Discussions towards a formation of a tea cartel or an International
Tea Producing  Association have been directed between these
nations.  The main players in these talks have been India and Sri
Lanka.

C.   GEOGRAPHIC FILTERS

9.   Geographic Locations

     a. Geographic Domain:    Asia 
     b. Geographic Site:      South Asia          
     c. Geographic Impact:    India     

10.  Sub-National Factors: No

11.  Type of Habitat: TEMPerate

D.   TRADE FILTERS

12.  Type of Measure: Regulatory STandard [REGSTD]

13.  Direct vs. Indirect Impacts" INDirect

14.  Relation of Trade Measure to Resource Impact

          a.  Directly Related:  Yes, tea  
          b.  Indirectly Related:  No
          c.  Not Related:  No 
          d.  Process: Yes, production, price

15.  Trade Product Identification: Tea


                           Table 260-2
                     Export of Tea (in tons)

Country        1987      1988      1989      1990

Sri Lanka      201       219       204       215
India          202       221       212       200
Kenya          135       138       163       181
Indonesia      90        92        114       111
China (*)      105       119       117       108
Malawi         33        37        40        43
Bangladesh     21        26        23        27
Tanzania       11        10        12        14

(*) excludes green tea
*International Tea Committee, Economist Intelligence Unit

                           Table 260-3
               Per Head Consumption of Tea (kg/yr)

Country        1984-86        1985-87        1986-88

Ireland        3.03           3.09           3.07
Iraq           2.72           2.51           2.95
U.K.           2.94           2.81           2.84
Kuwait         2.55           2.23           2.32
Egypt          1.54           1.44           1.40
USSR           0.85           0.88           0.87
U.S.           0.36           0.34           0.35

16.  Economic Data

                           Table 260-4
                Tea Production (in tons) for 1990
     
     India               715
     Sri Lanka           234
     China               205
     Kenya               197
     Indonesia           150
     Bangladesh           45

* International Tea Committee, Economist Intelligence Unit

In India the production of tea employs one and a half million
people.  The tea industry in Sri Lanka provides direct and indirect
employment for more than 650,000 employees. 

17.  Degree of Competitive Impact

                           Table 260-5
        Annual Average Tea Prices at London Auctions for
                     1990 (US cents a pound)

     India               65.1
     Sri Lanka           63.6
     China               62.1
     Kenya               66.3
     Indonesia           57.7
     Bangladesh          55.4

* International Tea Committee, Annual Bulletin of Statistics

18.  Industry Sector: FOOD

19.  Exporter and Importer: INDIA and MANY

E..  ENVIRONMENTAL CLUSTERS

20.  Environmental Problem Type:  Habitat Loss
          
Although India's remarkable increase in the production of tea in
recent years has been achieved with only slight expansion of
acreage, the majority of tea is cultivated in tea estates and
gardens which occupy approximately one million acres in northern
India. 
                                        
21.  Species Information

     Species:       Sau tree or Albizzia
                    stipulata, dhainena
                    plant, alubari plant
     Type:          Plant
     Diversity:     NA

22.  Impact and Effect:  High and PRODuct

23.  Urgency and Lifetime: Low and 5-10 years

24.  Substitutes: LIKE products

F.   OTHER FACTORS

25.  Culture: YES

Tea plays a strong role in the cultures of Asia.  The most popular
association with tea in Asia today is probably the Japanese tea
ceremony, where tea is prepared and served in a strict ritual
symbolizing aesthetic simplicity.  The origins of tea in Asia began
with China where Buddhist monks believed that tea had medicinal
qualities. Today, tea is a beverage in the Asian culture which is
served with the majority of all meals.  In the west, the most
popular cultural notion of tea is associated with the British tea
time.   

26.  Human Rights: No
     
Should tea prices continue to fall and if the costs of production
outweigh the demand for tea, it could possibly affect those
directly and indirectly employed in the tea industry.  Also,
decisions made between these countries regarding standards and   
regulations could also affect those individuals who depend on the
tea industry as their livelihood. 

27.  Trans-Boundary Issues: No

28.  Relevant Literature

De Soysa, Minoli, World's Leading Tea Producers to Form
Association.  Reuter-Asia-Pacific Business Report, April 25, 1995.

Jayasinghe, Amal, Tea Growers Push For Cartel Amid Market Slump,
Agence France Presse, July 21, 1994.

Ramachandran, Hari, Top Tea Makers Begin Talks to Set Up
Association.  Reuter-Asia-Pacific, April 27, 1993.

Ramaswami, Rama, Indian Teas:  Brewing Up A Storm, Tea & Coffee
Trade Journal, July 1993

Singh, Shamsher, et al.  Coffee, Tea, and Cocoa Market Prospects
and Development. Baltimore:  John Hopkins University Press, 1977.

Voss, Roger.  It's a Mugs Game, The Guardian, January 28, 1994.

Xinhua General Overseas News Service,  Sri Lantern Teas Shipped to
Russia Returned, August 21, 1993

Xinhua News Agency, CIS Tea Purchase Pattern Worries Indian Tea
Trade, March 29, 1994.

Xinhua News Agency, India's Tea Export to UK Up, June 25, 1993.




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