The ordeal of the tea farmers

The tea plantation industry is at a crossroads. This is no surprise for a company that spends 65 percent of its production costs on wages and wage-related costs, and whose farm gate revenues have not kept pace with wage and input costs.

The Indian tea plantation scene is characterized by two main ownership structures – the large and the small. The purchased leaf factories (BLF) achieve positive profit margins (factories that source most of their tea leaves from other growers) while emphasizing the economics of the larger model. Many companies have now developed “bought leaves” verticals that also generate decent profit margins.

The reason for this different economy is the low cost of raw materials – the green leaf of the small tea farmers (STGs). It’s cheap because they invariably do owner work, have no social and welfare costs, and have no or very little overhead. STG/BLF teas now account for over 50 percent of national production, and the trend is rising. It is also relevant that small producers own their land, a huge socio-economic safety net. A decentralized ownership model could well be the panacea for the future.

balancing factors

The tea plantation industry must strike a delicate balance between the economic viability of the business, the social and economic security of the workers/farmers, the preservation of biodiversity and mitigating the effects of climate change.

The restriction of activities to plantation areas and the limited choice of crops prescribed in the relevant land laws of the countries are obsolete. Leveraging the organized management skills and emerging power of agricultural technology, plantations should be enabled to grow a variety of new crops on a large scale on a critically relevant percentage of their land.

The areas under the new crops must have strict biodiversity, environmental and climate protection guidelines. Current legislation prohibits plantations from alienating land for purposes other than growing plantations. With limited demand, the value of these lands is at its lowest. Therefore, plantation owners must be allowed to sell a critical percentage of their land for real estate and industrial purposes. The resulting liquidity will help plantation management in activities such as replanting, factory modernization, etc.

At less than 2 percent, domestic consumption has not kept pace with production growth of more than 2 percent. Neither industry nor government has made any serious effort to improve consumption (and consequently the consumer value of tea). Exports are also stagnant – an additional 20-30 million kg of export is crucial to maintaining the supply-demand balance and consequently boosting domestic prices.

Such a master plan is necessary, especially considering the additional production from new areas.

The standard management reaction of increasing earnings no longer applies operationally either, which is related to the ever-increasing gap between price and costs – especially personnel costs. It is time for the tea plantation industry to look at the bottom line as the balance between production, revenue (price) and cost (labour). Neither factor can be targeted beyond a critical level at the expense of the other.

The shortage of labor must be seen as an opportunity for mechanization, consistent with changes in agronomic practices and the introduction of incentive schemes that support family income while reducing unit costs of production. The share of wages in the production costs of the plantations must fall to around 30 percent in order to remain competitive.

The tea industry has too many middlemen who cannot be justified. The enormous price premium from the farm gate to the consumer price makes the primary producers outsiders in the value chain. Value creation related to retail and branding served different business interests. The plantation business must acquire its own core competencies.

The author is a former President of the United Planters Association of Southern India