Mega Trends in the Global Tea Industry

Supply & Demand Considerations Anshuman Kanoria, Managing Partner Balaji Agro International

Indian Tea – Your cup of cheer… today and tomorrow! Presentation by Anshuman Kanoria, Managing Partner, Balaji Agro International, India On August 31st, 2011 at the 2nd Annual North American Tea Conference, Boston

Indian Tea Industry Overview Spread over 508,000 hectares Produces approx. 985 million kg tea Chief growing areas are: Assam South India incl Nilgiri Dooars and Terai Darjeeling Kangra / Uttaranchal Assam Kangra Darjeeling Terai, Dooars Nilgiri Meghalaya, Mizoram, Nagaland, Tripura, Arunachal Kerala, Tamilnadu (South India)

Looking back at Indian Tea

Production comparison ( India crop Jan – June’11 )

Auction Price Comparison – Indian ORTHODOX 2011~12 n 2010~11 Price trends Auction Price Comparison – Indian ORTHODOX 2011~12 n 2010~11 Lower orthodox prices for some grades: Result of higher Assam crop and payment issues due to embargo on Iran Presents great buying opportunities.

Auction Price Comparison – DARJEELING 2011~12 n 2010~11 Price trends Auction Price Comparison – DARJEELING 2011~12 n 2010~11 Strong demand for Darjeeling. 2 years of drought resulted in low 1st flush stocks larger offerings of 2011 seen as buying opportunity Strong domestic demand has pushed up base prices

Auction Prices ( CTC and Dust) ( North India ) Price outlook Auction Prices ( CTC and Dust) ( North India ) Higher prices of April to June are easing off on the back of larger crop

Price Comparison – South India Orthodox Price trends Price Comparison – South India Orthodox South India prices settling to 2010 levels after being slightly higher. South India teas still among the most competitive teas worldwide.

COLOMBO AUCTIONS ( Weekly Price comparison ) Firm price trend Jan to June 2011 crop seen approx 1.3% below 2010 ( 164.8 million kgs versus 167 m)

MOMBASA AUCTIONS ( Weekly Price comparison ) Higher price trend in 2011. Kenyan crop well off record highs of 2010 Kenya Jan to June 2011 crop approx 16.3% less than 2010 ( 178.4 million kgs vs 213)

Domestic Factors Govt supporting orthodox production - a commitment to tea exports. Orthodox production in India currently approx 80 million kilos : Expected to grow to about 100 million by 2016. Increase in small holdings : 157,504 with 163,326 hectares under tea. Produce approx 257 million kilos (26% of Indian crop). Up from about 11% in 2000. Inflationary increase in production costs. Over 25% wage hike to Darjeeling plantation workers this year. Climate change starting to impact tea production: Not much change in overall temperature or rainfall but more extreme conditions. Tea Research Association in India working to reduce potential impact of climate change.

Workers and Ethical Sourcing Indian tea industry committed to social welfare of its workers without external pressure. Indian tea sector spends approx 10% of total cost of production by way of additional social expenses for workers. Tea - The largest private sector employer in India. Individual tea estates virtually self sustaining communities. In last decade largest production increase came from small holdings (below 10 Hectares under tea) Small holdings :157,504 with 163,326 hectares under tea. Produce approx 257 million kilos (26% of Indian crop). Up from about 11% in 2000. Tea- Provides remunerative livelihood to rural communities.

Direct Employment and Statutory provisions for welfare of workers Social Costs incurred by Indian Tea Plantations Direct Employment and Statutory provisions for welfare of workers Direct employment Statutory provisions ESTIMATED NUMBER OF PERMANENT LABOUR DIRECTLY EMPLOYED IN TEA PLANTATIONS: Women Workers: 6,30,642 Male Workers: 6,00,180 18 to 21 years: 28,678 Total Workers: 12,59,500 The following facilities are to be provided to workers under the Plantation Labour Act,1951 Housing, Drinking Water, Free Medical treatment, Primary Education and Crèches for children Protective clothing (Umbrella/raincoat, slippers, blankets etc.) Workers are not allowed to work in excess of 48 hours a week Weekly holidays, Workers are also entitled to avail leave with wages. In North India by virtue of existing agreements and practices workers are provided with subsidized rations, Fuel, Dry tea, etc. Welfare of tea workers is enshrined in comprehensive labour legislation in India. Collective bargaining has matured and wage settlements are reached at bipartite / tripartite levels at periodic intervals. Stake holders are subjecting themselves to social audits on ethical practices by international agencies. 15

Traceability and Sustainability Over 75% of Indian production comes from organised plantation sector: Tea is traceable from cup to bush. Balance Leaf comes from small holdings: Tea is traceable from cup to manufacturing facility. Sustainability: India committed to sustainable agriculture with focus on environment, soil, labor. An ongoing process. Prices remain unviable in many areas. Without economic viability coming from remunerative prices, no sustainability for plantations.

The Industry’s Commitment to Sustainability, Quality & Safety Adoption of GAP and GMP that enrich and conserve the soil and minimize bio-sphere pollution. Quality Assurance Programme through HACCP certifications. Increasing use of eco-friendly packaging. ISO certification. Adoption of PFA standards for imports and exports. Tea Board set up national committee on MRL related issues. On top of the agenda. Trade interacting with Research Associations, other producing countries and importers on the MRL issue. Ethical Labor Practices The two major issues flagged by the FAO as factors affecting international demand are value chain analysis and trace ability. Ø      Trace ability is attributed to food safety norms and ethical labour standards. It is important to examine the India’s status on this counts. The issue of Pesticide Residue has assumed importance both for the domestic as well as the international market. MRLs fixed by different countries have created confusion of non-harmonization of permissible limits. The Indian Producer has to ensure that consignment conforms to the India’s specifications as well as those of the importing country. A Working Group was formed under the aegis of the IGG to progress the Agenda of harmonizing MRLs of each Tea producing countries with the Codex Norms. The harmonizing process, is however, taking time and I would request the Tea Board, the Ministry of Commerce to expedite this issue. The challenge here again is to sanitize the entire supply chain from the Bush to the Cup and, therefore, all Stake Holders, Small Growers, Producers, and the Trade would have to work together to take this agenda forward. 17

Domestic Consumption and Exports Domestic consumption in India : Growing at about 2.5% per annum. Exports in 2011 : Lower than 2010 to date Drop chiefly on account of lower exports to Iraq and Iran. Iran a key orthodox importer from India. US embargo has resulted in payment issues and affected exports. Egypt and Pakistan: Lower exports thus far. Adverse effect on South India prices. Silver lining : Growing interest in milk tea in South East Asia including China and Japan. China emerging as an important importer for Indian CTC teas.

Major Import Destinations of Tea from India USA -7th largest importer of Indian tea in quantity terms. 6th largest in value terms. USA – ranks 5th in unit price per kilo of Indian tea exports from India Canada - Follows USA in unit price per kilo of tea imported. Low quantities overall. Source: Tea Board of India

Indian Tea Exports to USA Quantity: In Thousand Kilos. Value: In Millions of US$ April to March PACKET TEA TEA BAG BULK TEA INSTANT TEA Year Qty ,000 kgs Value Mio US$ Total Qty 2009-10 895 3.95 1,152 8.43 6,123 17 1,642 9.96 9,812 2008-09 861 3.26 792 6 5609 15.29 1632 8.82 8,894 2007-08 1392 4.39 1072 5.30 5837 14.52 1595 9.40 9,896 2006-07 1040 3.06 803 3.69 5167 12.48 1753 11.46 8,763 2005-06 1306 3,95 1093 5.56 5205 12.42 1693 8.86 9,297 Source: Tea Board of India

Major Tea Exporters to USA – A Perspective 2 major exporters to US :Argentina and China. China production : Up from 1000 million kgs in 2006 to 1370 million kgs in 2010. Yet total exports constant around 300 million kgs. Great increase in domestic consumption. Can production growth keep pace with consumption growth? Indonesian production : Declined from 156 to 129 million between 2005-2010 Kenya production 2010 : All time record of 400 million kgs. Next highest production 369 million kgs. 2011 already down. Indian exportable surplus even in 2016 projected to remain steady. Exports of bulk teas from India to USA grew 16.66% in 2010 compared to 2009. This was after many years of negligible growth. Clearly India will remain a key player on the US tea import scene. Indian and Chinese consumption / exportable surplus – single largest factor in establishing future world prices.

The Case for Indian Tea in North America Is India a reliable long term tea supplier? Is it a good idea to incorporate it in your assortment and blends? The clear answer is yes. Exportable surplus available No other tea producer offers the great variety and diversity of flavours in classic teas that India offers. Indian tea best suited for North American chai/latte segment, teabag and specialty segment. Indian tea projection Production (Est) Domestic Consumption (Est) Exportable Surplus available Production year 2010 985,000,000 kgs 800,000,000 kgs 185,000,000 kgs 2016 1,100,000,000 kgs 905,000,000 kgs 195,000,000 kgs

North America and Indian Tea: Factors Why I am pushing the case for Indian tea today : Specialty tea: Availability from Darjeeling, Assam tippy orthodox and top CTC and Nilgiri. Sufficient quantity for US demand growing at almost 20% p.a. Value for money: A tea to suit most budgets. Wide range of qualities. ‘Ethical’ certified and organic teas gaining market share in North America : Growing number of Indian estates . Organic tea production currently approx 10 million kgs in India – expected to double by 2016. In sync with growing North American demand. The Indian tea industry -a Business with a heart : committed to worker welfare. Sustainability and traceability factors : In sync with global requirements. Govt of India committed to promoting Indian tea in the US : Launched the 5-5-5 scheme with USA as one of its 5 chief focus markets. India will actively promote its teas in North America.

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