Cesar Flores

Agribusiness Development Specialist East-West Management Institute 575 Madison Ave 25th Floor New York, NY 10022

Phone: 212-843-7660 Fax: 212-843-1485

E-mail: cesarflor@yahoo.com

SMALLHOLDER TEA VALUE CHAIN

A Livelihood Development Strategy for Earthquake Affected Pakistan

September 2006

Executive Summary
The report assesses the potential participation of smallholders in tea production in the earthquake affected region of Pakistan, and identifies ways to improve this participation. A value chain approach is used toward understanding the tea sector in Pakistan, and its linkages with domestic markets.

Objective: Integrate upland subsistence smallholders into tea cultivation.

The Pakistan domestic tea market can absorb production from 100 000 acres, supplied by a potential 125,000 growers. Possible solutions to overcome obstacles imposed by a poor irrigation infrastructure as well as credit, technical and organizational deficiencies are examined. Program Components Anticipated Results Target Community: Upland landholders with 7 kanals (0.8 acres) available Potential Beneficiaries: 300-350 additional smallholders per year Intermediate Outcomes 1. Organize producers 2. Optimize credit 3. Provide small-scale irrigation 4. Provide intercropping technology Livelihood Outlook: Sustained income from contract green leaf tea sales within 5 years

Tea cultivation as a livelihood activity

Agricultural constraints in earthquake affected Pakistan include: Most agriculture in the region is in low-value subsistence crops. The most vulnerable landholders have relatively small plots located on high sloping land without irrigation and affected by erosion and low soil fertility Mountain villages are distant from markets and road transport is slow and unreliable Farmers have limited access to capital or credit for agricultural inputs such as machinery, fertilizer and pesticides. Farmers often lack technical skills for growing high value cash crops

Advantages of Tea Cultivation In many ways the cultivation of tea should be a very attractive livelihood activity for smallholders in earthquake affected Pakistan: tea provides work and income for a long season, has a guaranteed market, good prices compared to other crops (fig. 1), and the risk of disastrous crop failure is fairly low. However, because of a lack of experience in tea cultivation, poor irrigation infrastructure and long time to maturity, there has been less incentive to get into tea cultivation (fig. 2). Many farmers have little perceived opportunity other than to grow their subsistence grains and fodder. Farmers in the region with land and capital available for cash crops often prefer planting risky vegetable cultivars that provide a return within 6 months, but offer the chance for a good profit only when market conditions are favorable.

Crop Vegetable Crops Maize Wheat Tobacco Rice Tea

USD per acre/year Variable 69 139 194 217 595

Figure 1. Potential net incomes from tea compared with other crops in Pakistan

In the long term, tea (Camellia Sinensis) may be a more reasonable and profitable investment. Tea plantings have a productive life of up to 100 years, and a harvest with a predictable annual yield. Most importantly, tea has a huge, stable and growing market in Pakistan.
Advantages of Tea Cultivation Permanent crop for 70-100 years Stabilizes hillside soil when mature Provides employment and income April-October Guaranteed market Fairly stable prices year to year Risk of crop failure low Figure 2. Disadvantages of Tea Cultivation Low prices relative to some vegetable crops 5 year period till maturity Three hour maximum transport distance Irrigation required Labor intensive (advantage?)

Tea Market
Consumption
Tea is Pakistans most popular and cheapest beverage. The annual consumption, about 150 million kg., fluctuates at just under 1 kg. per person per year; this is the worlds seventh highest consumption. 66 percent of the countrys total population of 154 million live in rural areas, where tea consumption is greatest. Sweetened black tea taken with milk is most common.

Photo 1. Tea is the most popular beverage in Pakistan

The retail market is extremely price sensitive and of mostly low price bulk CTC (Crush, Tear, Curl process) teas, although there is a small market segment for high quality tea (Orthodox process) and some limited green tea (Kawa) consumed in the Western districts, estimated at 1.5 million kg./ year.

Imports
Pakistan became a major world tea importer overnight when in 1971 it separated from East Pakistan, a large producer. It is now the worlds third largest tea importing country, following the Russian Federation and the UK. 114 000 000 kg. from 19 countries were imported in FY06. Kenya is the leading supplier with 57 percent of Pakistans imports in FY06. Imports total 192.6 million USD in FY06.

Smuggling
Illegal imports are substantial, nearly 1/3 of domestic consumption and an 81 million USD business. Most is Indian low grade bulk tea transported through Afghanistan and sold bulk in markets in the towns near the Western border. The trade is growing, 48 000 000 kgs. were brought illegally into the country during FY06 and 40 000 000 kgs. in FY05, a 10 percent increase. Legal imports declined 12.5 percent in the same period.

Processing and Distribution

The Pakistans tea makers can be classified into the blended and packed segment of the market and the "loose" tea segment. Blending, packing and distribution is dominated by Unilever, the worlds largest transnational corporation in the tea industry, and Tapal Ltd., a very competitive local firm with a 21 percent share of the domestic branded tea market. Both are based in the port city of Karachi. There are some other minor players. Out of the recent total legal imports of 114 000 000 kgs., 70 000 000 kgs. went to the packers, while the rest was imported by independent traders who sell loose tea in the open markets.

Domestic Production
Pakistan has good but not ideal growing conditions for tea. Trials have shown that 1500-2500 kg can be produced on one acre of land here. The quality of tea produced in Pakistan has been found to be comparable with that from Sri Lanka and Kenya.

Photo 2. Tea growing region in Pakistan

There are 1622 acres of tea (1100 acres of Unilever supplied saplings, and 522 acres Government supplied saplings) currently under cultivation in Pakistan. Growers fields are all small tea gardens, unlike the historically large tea plantations of India and Sri Lanka. As the required

acreage to satisfy domestic demand is approximately 100 000 acres, domestic import substitution has only just begun. At a minimum 0.8 acres per smallholder, the potential exists for a hypothetical 125,000 growers to enter the market before reaching saturation. Unilever is producing one million cloned tea cuttings annually for distribution to smallholders. The government program is producing similar quantities from seed. Mansehra, Swat, Battagram, and Chittral have been identified as good growing areas, although any smallholders land with the following minimum requirements can profitably grow tea: 0.8 acres or more with 3 feet soil depth and preferably acid soil, slope 3% or more Rainfall above 100 mm, temperatures maximum 37 centigrade daytime, 12 nighttime Irrigation for period May-June Two hours transport distance to the processor

There are two processing plants in Pakistan producing CTC black tea. In 2001, Unilever established a tea processing plant in Mansehra district in the earthquake affected region (photo 3). This plant can process one ton of made tea per day and is operating at below capacity due to shortfalls in green leaf. A single processing plant can serve 300 acres, future plants will be constructed as tea gardens come on line.

Photo 3. Unilever tea processing plant - Mansehra

A parallel government operation also exists in Mansehra district. This is a similarly sized plant built with Chinese technology and operated by the Pakistan Agricultural Research Council (PARC). There are significant differences between these two operations in marketing. Unilever has a fully integrated vertical production and marketing system and a strong brand presence in Pakistan, while the unlinked government plant must sell made tea at auction to the packers. A potentially important safeguard exists in tea production in Pakistan; Unilever is one of 50 transnational corporations that signed a UN pact on rights and the environment. The pact imposes an obligation to support human rights, eliminate child labor, allow free trade unions and refrain from polluting the environment.

Government interest in Tea production

The Pakistan government has identified tea production as a national agriculture policy priority in order to reduce foreign exchange expenditures for imports and revenue losses from smuggling. A tea board is being set up in Mansehra to promote tea production in Northwest Frontier Provinces

and Azad Jammu Kashmir. The board has representatives from the tea growing community in Swat, Battagram and Mansehra, Ministry of Food and Agriculture and PARC. On the other front, the government is trying to control smuggling by liberalizing imports. Duties for India tea have been reduced from 35 to 10 percent. However, there is still a 15 percent sales tax, an additional 10 percent VAT and 2 percent income tax on imports, resulting in a retail price for smuggled tea 0.50 USD cheaper per kilo than legal India tea.

Contract Farming
A key component of the tea value chain in Pakistan will be a functioning contract farming system. This type of plan guarantees markets for growers and coordinates supply for the processors. Unilever and PARC collect leaf directly from the smallholders and both currently have attractive buyback agreements available for farmers going into tea crops. Unilevers buyback agreement offers: A 10 year agreement with option for extension Greenleaf purchase price set above market as a subsidy to stimulate production Accepting 5 leaves and a bud, instead of the customary 3 leaves and a bud as a further subsidy Providing tea transplants, and other non labor inputs: fertilizer, extension, pest control Providing transportation of harvest to the processing plant This growers contract reduces farmer risk, provides access to crucial technologies and services. Contract growing is an advantage for the processors as well, who need to assure minimum levels of production. Unilever is committed to adding 100-150 acres per year into tea cultivation under contract; although with difficulty, for the reasons outlined in this report. One obstacle that inhibits contract growing operations is the cost of organizing smallholders to inform them about the benefits of participating and for intermediating collectively with the processors.

Credit for growers

Credit for operating funds is a prerequisite for nearly all new tea growers due to the costs incurred during the 5 year time to maturity of the crop (fig. 3). Zarai Taraqiati Bank Limited has allotted 16 500 USD for lending in Tea cultivation in Swat. The bank is also actively extending loans in Mansehra and Battagram. The loans are: Interest free for 4 years 1000 USD per acre Rate 5000 @ .05 5 hours @ 3.30/hour .02 per sapling 100 / year 3 laborers @ 1.65 x 200 days Cost USD 247 16.5 124 300 990 1675

Input Tea plants Land preparation by tractor Transplantation Fertilizer for 3 years Labor for weeding/fertilizing Total

Figure 3. Costs for establishing a one acre tea garden in Pakistan during the first 3 years

To date, not a single loan has been made in the Swat valley since the inception of the loan program in 2001. Loans have been made in Battagram and Mansehra.

Analysis
Constraints in tea production:
Lack of Irrigation. Eighty percent of the precipitation falls during the monsoon season. Therefore, even where precipitation is intense, scarcity of water is common during the dry period. Large scale irrigation development up to now has been confined to canal-irrigation schemes in the lowlands, benefiting the wealthier farmers in the region (land ownership in lowlands is held by wealthier farmers). Tea growers are located in uplands and geographically dispersed, not served by large irrigation projects. Even small-scale irrigation is an investment beyond the finances of many smallholders. Long time to crop maturity. Tea requires a five year gestation period. Since many costs during this span can be covered by credit, the primary grievance is anticipated lost potential income during the long period. Some tea gardens have been planted under existing fruit orchards in Swat, but in general, tea is currently monocropped. Smallholders not organized. There are no existing effective tea growing associations in Pakistan. Communities with potential tea growing areas still have little accurate information about the opportunity to grow tea. More importantly, since tea production is only now getting started in Pakistan, a strong growers association could be decisive in defending the growers interests as the industry expands and changes over time. Credit offerings not optimal. Many of the existing growers in all areas of Pakistan are currently self-financed and averse to accepting credit. Total dollar amount of the loans offered are perceived as less than projected costs, and term length less than needed. Loans are for operating expenses only, not for improvements such as irrigation. Additionally, there exists a traditional resistance of farmers in the region to accept any credit for agriculture.

Recommendations
1. Organize growers. Establishing a producers association would strengthen the collective power of farmers under contract and give tea processors more confidence in dealing with the growers. Relationships could be enhanced with contracting mechanisms that strengthen interaction between producers and the processors. This should include developing transparency in procurement arrangements, so that producers understand the standards required and that processors apply their standards fairly. A more immediate function of a producers group is to approach communities with a group structure designed to disseminate information and educate potential growers about tea as a cash crop. 2. Optimize Credit. A growers association would also form a basis for negotiating capital support for investment in tea production. Fine-tuning is required to better match loans with the actual credit requirements of the farmers. Creative approaches to credit and repayment terms may also positively persuade farmers to accept agriculture loans for tea cultivation. The credit that is available can be earmarked for capital improvements such as the vital irrigation installations as well as operating expenses.

3. Provide Small-scale Irrigation. Technologies exist to use upland, runoff water and precision piped sources for irrigation by farmers in the dry season. These consist of storage tanks, Small pits lined with plastic film, ponds (photo 5) and drip delivery systems. These systems are efficient, surprisingly inexpensive, cause little soil erosion and are easy to manage when compared with canal systems. A shift is required away from bottomland, large canal type irrigation systems to upland, pipe and tank type micro-irrigation systems in the tea growing region. These small-scale systems are either on-farm or single village sized and are appropriate for community participation and financing if necessary. In addition, the systems are by their structure and location more equitable in socio-economic and gender impact. Small irrigation systems can be localized and linked to the dispersed growers who are committed to tea growing. A low-cost drip system in Pakistan can irrigate one acre for 250 USD. A mini-storage plastic lined tank storing 10 cubic meters of water has an installed cost of roughly 40 USD and a life expectancy of 5 years.

Photo 5. Small on-farm irrigation pond

Photo 6. Young tea plants with vegetables

4. Provide Intercropping resources. Providing tea growers with resources and technology for intercropping with tea will generate cash income for the 5 year growth period (photo 6Thailand). One compelling motivator for intercropping is the positive collateral affect of inputs applied to the tea crop. Soil preparation, fertilizer and other applications provided in the tea production can be partially diverted for use by the secondary crop. Intercropped fields in other tea producing countries have produced bumper crops of vegetables in the first 3 years, due to the otherwise unavailable support provided by the tea crop resources. Legumes, like cowpeas and soybeans, and Lucerne have also been productive and have the added benefit of fixing nitrogen and stabilizing the soil during the early tea growth. At a minimum, maize, and traditional fodder crops are possible for additional subsistence production. Tea grows best under some shade. Rubber trees are the traditional upper story crop for tea in Asia, but there is some experience with others more appropriate for Pakistan. Fruit or fast growing fodder trees can be planted to provide shade, leaf fall humus and additional sustained income for tea gardens in the region. The intercrop resources and technology could ideally be packaged with an offer to grow tea under contract. This strategy may make a persuasive economic incentive to overcome growers resistance to tea cultivation.