A blending hub for tea? Not at this time | Daily News

A blending hub for tea? Not at this time

I refer to the article, ‘Consequences of not Liberalizing Tea Imports’, published by the Tea Exporters’ Association (TEA) in the Daily News of June 16.

While making the case for liberalization, the article omits to mention the possible negative effects of such a policy. As pointed out by the TEA, this matter has been debated for 15 years.

This procrastination is likely because there are strong arguments for and against, each of which entails serious consequences for the tea industry and the national economy.

Like Brexit, this is a complex issue with sound arguments on both sides. Neither opening the floodgates to the import of orthodox tea nor shutting out tea imports altogether, is in my opinion practical.

As the TEA concedes in its article, the tea exporters too, are split down the middle on this issue. Several large exporters of both value-added and bulk tea adamantly opposefurther liberalization. This makes it additionally difficult for the government to revise the existing policy.

Nevertheless, the TEA has had ample opportunity to present its case: its chairman serves on the Sri Lanka Tea Board and the association was represented also on the cabinet-appointed committee that advised on this matter.

Clearly, there are two sides to this debate. Both deserve to be heard, and if only because the TEA has (understandably) not presented the other side, I will attempt to summarize it here.

I emphasize that what is important is not to score debating points but to understand the competing forces that must inform policy in this area.

Background

Sri Lanka has a 150-year history of producing tea. The ‘Ceylon’ origin today symbolizes teas of the highest quality, setting Ceylon teas apart from those of competitor countries. Ceylon tea thus attracts a substantial premium over teas from other origins.

The ‘quality’ of Ceylon tea derives from several attributes unavailable to competing origins, including, in combination: flavour, aroma and colour; characteristic regional diversity; strictly-regulated residue standards; high ethical standards (e.g. no child labour); and good manufacturing practices.

The ‘Ceylon’ origin is uniquely associated with these values. These are the common property and heritage of the industry.

The Sri Lanka Tea Board permits only teas of 100% Sri Lankan origin that are also packaged for retail in Sri Lanka to be labelled with the ‘Ceylon’ origin, usually as ‘Pure Ceylon Tea’.

However, the ‘Ceylon’ origin is widely abused in many consumer countries, causing the Tea Board to mount expensive legal challenges. If nothing else, this demonstrates the value of the ‘Ceylon’ appellation.

Sri Lanka is the world’s largest exporter of orthodox tea. The orthodox method of production results in more than 20 grades of tea differing in particle size, appearance, colour, aroma, liquor etc., a far greater diversity than CTC teas.

Orthodox vs CTC is thus essentially a matter of specialization versus commoditization. Because CTCs are ideally suited to tea bags, world demand is largely for CTCs.

CTCs, however, account for only about 6% of our national production and usually fetch significantly lower prices than premium orthodox teas.

To help Sri Lankan exporters compete effectively in the global market, the import of CTC teas for blending and re-export has been permitted for the past several years.

In 2016, for example, 2.9million kilogrammes of CTCs were imported, approximately 1% of national orthodox production.

At the request of the TEA, and with the support of the Tea Board, the government recently agreed to abolish the 1% import duty levied on such imports. The import of orthodox tea too, is permitted, subject to a 25% duty on the CIF value.

When exported, such blended teas are usually labelled with words like ‘A blend of Ceylon and other-origin teas, packed in Sri Lanka’.

Unfortunately, though most CTC teas can be freely imported for blending and re-export, this opportunity has not been seized by exporters.

Few exporters have availed themselves also of the opportunity to import orthodox teas, paying the 25% duty. While 25% may seem excessive, it should be borne in mind that the average price at the Colombo auction increased by as much as 50% during the past year.

If that was afforded (albeit with much difficulty) by the export community, surely the 25% tariff on the import of much cheaper orthodox teas is hardly a formidable disincentive? And shouldn’t there be some disincentive to other countries dumping cheap tea in Sri Lanka and damaging the country’s premium brand? Would, for example, France’s wine industry import and blend cheaper imports with its own produce?

Sri Lanka’s value-added tea industry (some 40% of exports by volume are in ‘value-added’ form), which is the envy of other tea-exporting countries, is strongly reliant on the global reputation of the Ceylon origin.

A few exporters who emphasize the origin have created brands that are able regularly to achieve FOB averages of more than Rs 1,600 per kg for quantities in excess of 5 millionkilogrammes annually, indicating the potential of value-addition for the industry at large.

Theaverage FOB value of value-added tea in 2016 was, however, only Rs 785 per kg, which suggests there is a lot more potential that could be tapped.

My mention of these statistics is by no means intended to belittle exporters who do not achieve top prices: I grant that the building of big brands calls for big investment, huge risk, and perhaps most importantly, the contingency of good luck.

The case against blending

For brevity, I here refer to as ‘blending’ - the process of importing orthodox teas duty-free from other origins for value addition and re-export, usually after blending with Ceylon tea.

The primary opposition to blending stems from a perception that the unique value of the Ceylon origin will be diluted or damaged.

Unlike in the case of industrial products, consumers of food products attachmuch importance to the origin of the foods they consume.

Just as French wine, Colombian coffee, Norwegian salmonand California oranges attract a premium, so does Ceylon tea.

Thus, even if blended teas do not use the word ‘Ceylon’, the fact that they are packed in Sri Lanka may result in consumers equating them with Ceylon tea, diminishing the prestige of the latter. Would consumers, for example, attach the same value to a watch ‘Made in Switzerland’ as to a watch ‘Made in Switzerland using Swiss and other-origin parts’?

While it is true that brands have out-marketed origins in the case of many goods including some foods, origins still hold value in the case of premium foods.

For example, Nescafe produces Classic and Gold, unremarkable instant coffees sold on price without any mention of bean-type or origin. But Nespresso, their premium offering, is sold with the unique virtues of each origin being highlighted and celebrated.

With Ceylon tea aspiring to the premium end of the market, we need to embrace quality, authenticity, provenance and ethics, not seek the lowest common denominator by diluting the prestige of the Ceylon brand with other origins.

A brand may nevertheless incorporate substantial quality variation, as evidenced by the huge price-range of same-label wines and whiskies, e.g., the Red, Black, Gold and Blue labelling system Johnny Walker has adopted, or the phenomenal range of wines marketed by labels such as Wolf Blass.

This position is underlined by the fact that several major international tea brands use ‘Ceylon’ in their labelling, even for teas blended with those from other origins such as India, or perhaps with no Ceylon tea content at all.

Additionally, several unauthorized and misleading uses of the Ceylon origin (in forms such as ‘Ceylon Plus’, ‘Ceylon Gold’, ‘Mild Ceylon’ and the like) and even the Lion Logo are commonplace.

It is therefore clear that the ‘Ceylon’ brand carries great value, and allowing its dilution with teas of other origins will only diminish the reputation won by the brand over the past 150 years.

There is also a risk that orthodox teas imported for blending purposes will find their way into the local market, to be re-exported as Ceylon tea. In addition to depressing demand for our teas, once consumers discover such malpractices, they will cease placing a premium on Ceylon tea, to the detriment of the industry.

Most of our tea exports go in the form of bulk or ‘value-added to order’ to an ever-smaller number of importers in overseas markets who squeeze our exporters to minimize their margins and maximize their credit.

It is for this reason that the average FOB price even of value-added tea is as low as Rs 780 /kg. The pressure to blend with other origins to reduce cost while retaining the ‘Ceylon’ brand-appeal seems to originate largely from these importers.

However, exporters who develop and aggressively promotetheir own brands stand to make much higher margins; they are much more jealous of the Ceylon brand. The challenge for exporters then, is to strive to become genuine value-adders, appealing directly to consumers, capitalizing on the premium the Ceylon origin gives them. I fully realise this is easier said than done.

If we now decide to freely blend our orthodox teas with other orthodox teas by removing the 25% import duty, we stand to reduce our quality to the detriment of Sri Lankan and overseas brands loyal to the concept of Pure Ceylon Tea.

We will also devalue the equity of Pure Ceylon tea in the eyes of consumers. The fact that the ‘Ceylon’ origin is widely counterfeited and dishonestly labelled only highlights its value.

The challenge that faces us therefore, is to help exporters place their ‘Pure Ceylon’ products on shop shelves overseas, not to dilute their key value proposition, namely the Ceylon origin.

Exporters ask why they are being held captive and forced to buy and export only Ceylon tea to a world market that demands teas of all types and origins. The truth is that subject to modest tariffs exporters can even now import any raw materials they like, including green, white, CTC, specialty and even (subject to the 25% duty) orthodox tea.

Why then, is Sri Lanka not the tea-bagging hub of the world? Despite these freedoms, only a single exporter has engaged substantially in importing sizeable volumes of CTC teas and re-exporting these in value-added form.

Sri Lanka’s tea industry has through 150 years of toil established itself as the world’s premier producer of black tea. It is a well-established principle of marketing that a product cannot be positioned as both premium and cheap.

The question before us is, do we follow a ‘Pure Ceylon’ strategy or ‘Packed in Sri Lanka’ strategy?The former argues that Ceylon Tea is a public good that is the common property of all Sri Lankans whereas the latter avers that the Ceylon brand may be worth trading for greater export revenues.

It is accepted that the premium value of Ceylon does not apply to all teas of Sri Lankan origin. There are good teas, to which ‘Ceylon’ adds special value, and ordinary teas, which probably do not benefit from the origin.

However, it is the premium teas that pull the rest of the industry along, just as the premium value ofchampagne and Chateau Lafite benefits the entire French wine industry. Everything possible must therefore be done to safeguard the Ceylon origin for the benefit of the entire industry.

When we allow orthodox teas from other origins such as Indonesia and Vietnam to enter Sri Lanka for blending, we indirectly endorse these origins and give them an entry to our hard-won captive markets.

By using our value-addition expertise and the prestige of the Ceylon originto take these teas to our consumers, we are only creating, perversely, a new marketplace for our competitors, while further weakening the production sector in our country.

The future of tea

Personally, I see merit in both sides of this debate. I here present mainly the case against blending simply because it too, deserves to be heard. The matter is not as self-evident as the TEA suggests.

From the government’s perspective, this question boils down to what future is envisaged for our tea industries [sic], for the fact of the matter is that we have two tea industries: producers and exporters.

These two sectors are necessarily at odds. Producers want to sell their tea at the highest price while exporters want to buy it at the lowest price. And producers have a vested interest in holding the exporters captive, with limited access to raw materials from other origins.

Although this ‘conflict of interest’ is moderated by the tea auction, it is not moderated linearly. Last year, for example, when tea production fell by some 10%, the auction prices rose by almost 50%. This places huge stress on exporters, who often have forward-contracted and cannot up their price simply because of rising raw-material costs.

Their margins get squeezed and naturally they want access to cheaper orthodox teas. But this begs the question, to what heights would the Colombo auction have risen last year if the 10% production shortfall had been bridged by cheap imports?

The TEA is right to claim that both the extent of land under tea and the quantity of tea produced by Sri Lanka are declining. This reflects an economic reality: the fact that, owing to Sri Lanka’s per capita GDP being streets ahead of its nearest competitors, its cost of living (and hence wages) too, are much higher.

Labour represents about 75% of the cost of production. Our tea is thus set to become yet more expensive even as our rivals continue to produce theirs much more cheaply than we do. Where does this end?

I often receive letters from retired planters urging the government to intervene more strongly in the industry. I believe, however, that state intervention in the forces that shape industry is futile and counter-productive.

We should not forget the disaster that followed the state’s post-nationalization intervention via the monolithic institutions of the JEDB and SLSPC. Unless the tea industry remains diverse, competitive and dynamic it cannot develop the innovations that will see it thrive in the future. The state’s role should be to facilitate and regulate, not to operate.

Neitherdo I believe that it is sustainable for the state to prop the producers up by handing out subsidies, whether for replanting, factory modernization or anything else. The industry must stand on its own feet.

This means that factories making poor-quality teas must, if their cost of production is too high, eventually drop out, depressing output still further.

Sri Lanka at a crossroads

This is not to say blending is all bad. There is no doubt that Sri Lanka lost a great deal by disincentivizing the multinational companies that wanted to bBlend tea here.

Now they do so offshore, with little incentive to buy Ceylon tea, though sometimespirating the Ceylon origin. At the same time, principally because of our high prices and regulatory inflexibility, we have largely lost key tea markets such as the UK, Pakistan, Egypt, Yemen, Tunisia, South Africa and Poland, which we dominated just decades ago.

Blending would arguably have allowed us to retain these markets, none of which has since been regained. Even now, the trends in key Ceylon tea markets such as Saudi Arabia and the Russian Federation are waning. These losses are perhaps mainly due to our high prices but arguably also at least in part because we failed to liberalize our export industry.

The case for blending includes also some arguments that the TEA may not have emphasized sufficiently. The decline in tea production is driven also by the aspirations of our people.

No one wants to be a tea-plucker anymore. There is an acute dearth of labour in the plantations. The youth in these areas too, have dreams. They want to work not in the fields but in the ‘value-added’service economy of the future.

Blending accelerates transition to that future, with jobs in packaging, design, logistics, financial services and the like - even driving a tuk-tuk. The migration of labour will reduce yet further the amount of tea locally available to exporters, strengthening the case for blending.

The tension we see between the constituencies for and against blending are a symptom of Sri Lanka being at a crossroads: an agricultural economy transitioning to a predominantly service economymore like those of Singapore or Dubai.

The question is, how rapidly will this transition occur? If it will take 20 more years, blending is probably a bad idea at this point. If it will take five, then that prospect changes dramatically. Between those extremes there is undoubtedly some wriggle room in which innovations could be tested.

Examples of such innovations are the provisions to freely import CTC main grades and, on payment of the 25% tariff, orthodox teas for blending. The TEA would be wise to seek the consensus of the wider industrial constituency and propose further innovations so that a smooth, incremental transition to a new industrial paradigm becomes possible.

We can see for ourselves in the SAITM fiasco what happens when a consensual, incremental approach to innovation is spurned.

Finally, the Minister of Plantation Industries, Navin Dissanayake, has made it clear that he is open to blending if there is clear industrial consensus. Neither he nor I have uttered a ‘Not on my watch’response to this question.

In the present circumstances, however, and subject to the realities I have outlined above, I am opposed to a complete liberalization of tea imports, particularly the tariff-free import of orthodox teas. But this policy is not carved in stone: it must necessarily evolve as the industry and the economy evolve.

 

(The writer is Chairman, Sri Lanka Tea Board)


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