Orthodox Tea Value Chain Study Report (draft case study submitted to Unnati Access to Finance Project)

 Orthodox Tea Value Chain Study Report    

Introduction of Tea

Tea is an aromatic beverage commonly prepared by pouring hot or boiling water over cured leaves of the “Camellia sinensific ”.

Tea crop is one of the major cash crops of Nepal.  Primarily, there are two types of tea Orthodox Tea and CTC Tea.

Orthodox Tea

Orthodox Teas (handmade tea, hand-processed tea, rolled tea) are whole leaf teas manufactured using the traditional process of making tea or in another way, orthodox tea refers to either hand-processed tea or tea that is rolled with machinery in a manner that mimics hand-rolling.  Most of the specialty teas, like green tea, black tea, oolong tea, white tea and hand rolled tea come under the category of orthodox tea.  In Nepal, orthodox tea is produced and processed in the mountainous regions at an altitude ranging from 3,000 – 7,000 feet above the sea level.

Major Area for Orthodox Tea Production

There are six major districts, primarily in the eastern regions of Nepal that are known for producing quality orthodox tea, which are Ilam, Panchthar, Dhankuta, Terhathum, Sindhulpalchok and Kaski.

Last 5 years tea production/consumption pattern (including CTC Tea & Orthodox Tea)

                                                                                                Qty in kg

Years	Production	Export  (90% exported)	Domestic Consumption)
2066/067	16,607,555	14,946,800	1,660,756
2067/068	17,437,933	15,694,140	1,743,793
2068/069	18,309,824	16,478,842	1,830,982
2069/070	20,588,145	18,529,331	2,058,815
2070/071	21,076,366	18,968,729	2,107,637
2071/072	23,186,726	20,868,053	2,318,673

Ø  Out of the total, approximately 13-15% Tea is being produced as Orthodox Tea. Currently, approximately 2,320 MT of orthodox tea is assumed to be produced in Nepal.

 

Ø  Further, out of total Orthodox Tea production, Ilam district alone produced approximately 75% to 80% of tea. Remaining produced in Terhathum, Pachthar, Dhankuta etc.

 

Ø  Nepal exports approximately 2,200 MT of Orthodox Tea annually (which is approximately 90 to 95% of total production), out of which approximately 85% assumed to be exported to India remaining to Germany, Japan, Russia and few other countries. Sales revenue from the orthodox tea is approximately USD 5.9 million.

 

Ø  Similarly, approximately 5-10 % of orthodox tea is being consumed locally, sold to Kathmandu (65% at Kathmandu, remaining to Pokhara, Biratnagar, foreign nationals residing in Nepal and other Institutional Customer i.e. Hotel/Resort etc.)

 

Ø  Nepal imports 25 % of the total consumption (Orthodox Tea); India is major supplier of Orthodox Tea (approximately 65%). Remaining 35% is being fulfilled by imports from Srilanka, China, Malaysia, Singapore etc.

 

Ø  Agriculture sector have contribution of 36% on GDP of the country, where Orthodox Tea contributes substantial amount on GDP as quality cash crop.

Industry Environment:

Current Competition: Competition in terms of price with Indian Market

New Entrants: Gradually other districts of Nepal like Kathmandu, Sindupalchowk, Dolakha and Kaski have also started tea cultivation.

Substitutes: Coffee is the major substitute for tea. Major areas of coffee cultivation are Gulmi, Palpa, Syangha and various other eastern parts of the country.

 

SWOT Analysis of Orthodox Tea Sector

 

Strengths

 

Ø  Favorable climatic/geological condition

Ø  Topography

Ø  Virgin land cultivation; young tea bushes

Ø  Environment friendly crop that also attracting internal/external tourist

Ø  Sufficient Area for Tea Cultivation

Ø  Shorter Crop Cycle

Ø  Co-operation and already established product value chain

Ø  Changing perspective towards Organic tea with ample demand

Ø  Private sector engagement with latest technology

Ø  Steady growth/demand for both value and quantity

Ø  Access to Finance through Commercial Bank and financial institution with new mobile/BLB technology

Ø  Governments prioritized sector

Ø  100% cash crop

 

Weakness

 

Ø  Low productivity

Ø  Scattered harvesting

Ø  High use of Pesticides & fertilizers

Ø  Low quality, high production cost

Ø  Input supply, absence of commercial nursery, labor and other logistic

Ø  Lack of technical expertise and infrastructure

Ø  Absence of warehouse, Auction Market and Accredited Agency

Ø  Poor product reputation due to in-consistent quality etc.

Ø  VAT, Tax issues

Ø  Access to finance

Ø  Not properly established, integrated value chain

Ø  Unstable, un-systemic pricing system

Ø   Lack of R&D activities/investment

Ø   Inadequate subsides and incentives etc.

Ø  High dependency on Indian Market

Ø  Poor packaging, branding, transportation of green tea, leaf etc.

Ø  Effective implementation of existing act and policies, absence of properly guided commodity market etc.

 

Opportunities

 

Ø  Greater scope of expansion of tea plantation area

Ø  Huge Indian Market with Niche prospect in other international market

Ø  Easiness in technology and expertise

Ø  Importation due to proximity of Darjeeling, renowned tea location

Ø  More factories and small processors coming up

Ø  Increasing involvement of private sectors

Ø  Increasing recognition of Nepal Tea brand Production

Threat

Ø  Limited financing for farmers

Ø  Global warming and other natural calamities

Ø  Heavy reliance in Indian market

Ø  Inconsistent Indian Import policy

Ø  Limited support from Nepal Government/NRB and high interest rate in micro-finance credit

 

 Supporting /Regulatory Institution

Ø  Central Tea Cooperative Federation (CTCF)

Ø  Himalayan Orthodox Tea Producers Association (HOTPA)

Ø  Himalayan Tea Producers Cooperative (HIMCOP):

Ø  Tea Development Alliance (TDA):

Ø  Agro Enterprise Center (AEC)/Federation of Nepalese Chamber of Commerce and

Industries (FNCCI):

Ø  Development organizations and donor projects

Ø  Ministries and National Planning Commission (NPC)

Ø  District Agriculture Development Offices (DADO):

Ø  National Tea and Coffee Development Board (NTCDB)

Ø  Commercial Agriculture Alliance (CAA)/Commercial Agriculture Development Project

(CADP):

Ø  Nepal Tea and Coffee Producers Associations

Ø  Nepal Tea and Coffee Development Board, Nepal

Ø  Nepal Agriculture Research Council (NARC)

Ø  CTEVT

Ø  Nepal Rastra Bank (Central Bank)

Ø  National Seeds Company Ltd

Ø  Bank and financial institutions

Ø  D class financial institution, Fingo etc.

Role of above support or regulatory institution is to provide technical, financial, policy and regulatory support & strengthen orthodox tea value chain.

Key Actor & their role

Ø  Input Supplier:

To supply the necessary inputs along with tea slapping, lands, fertilizers, insecticides, pesticides, laborers etc. Mostly it includes agro vets industries, centers, suppliers, commercial nurseries and lease land owners etc.

Ø  Farmers:

Farmers are those who produce teal leaf required for the production of orthodox tea. Farmers can be categorized as Small Scale, Medium Scale and Large Scale. They play major role in value chain, farmers can directly sale the green leaf to processor or can sell the green leaf to co-operative, collection centers, small scale processers etc.

 

Ø  Local Collector/Collection Center/Co-operative/Aggregator/Small Scale Processer:

They provide financial as well as well as technical support to farmer/input supplier during the course of production and supply of green leaf for orthodox tea. They collect the leaf (through collection centers, co-operative societies, as an aggregator etc.) and provide raw leaf to small/large scale processer. Sometimes they themselves (Co-operatives, small scale processers) process themselves and sale processed tea to next value chain actors i.e. sell the products to domestic market through wholesaler etc.

 

Ø  Processer: Processer processes the raw green leaf and converts to the final product, after branding and packaging of the orthodox tea they either export themselves or sold through HIMCOP (Himalaya Co-operative, association of Processer Group). They receive green leaf directly from farmer or local collector, from collection centers, co-operatives etc. Processer plays the major role for supply/production driven value chain, may provide financial as well as technical assistance to farmer, input supplier, co-operatives/collection centers etc.

 

Ø  Exporting firm/HIMCOP: Upon getting the readymade (final product) of quality orthodox tea, firm/HIMCOP sold their products either in local market/India or foreign country. As they have strong co-operation within the producers and have bargaining power, they will have co-operative power to get better rates of tea, identify the alternative market etc.

 

 

 

 

 

 

 

Loan Products for Value Chain Actors

Input Suppliers

Ø  Land Owner: Long term loan to procure the land (fixed term loan for leasing the land)

Ø  Aggravate Supplier/Aggravate Industries: Working capital loan to meet working capital requirement, Import loans to import the fertilizer, pesticides etc and incase an industry, long term loan (fixed term loans ) to invest in fixed assets, finance in equipment’s/technologies, land & building etc.

Ø  Commercial nursery: Short term as well as medium term loan (up to 2/3 years) to grow the tea plant, prepare the sheds, short term loans to meet working capitals etc.

Farmers

Ø  Medium term/long term loan fixed term loan to purchase sapling, land purchase/leasing and sometime ensure irrigation

Ø  Medium term loan up to 5 years for transportation and other equipment’s

Ø  Working capital loans to fulfill labor expenses, meet social needs i.e. consumption, family expenses, purchase of fertilizers, pay the technical assistance etc.

 

Collection Center/Co-operative Societies/Small Scale Processors

Ø  Short term loan/medium term loan to fulfill input suppliers and farmers needs

Ø  Long term loan to purchase logistic i.e. transportation etc

Ø  Long term loans to purchase of equipment/processing plant etc (small scale processor)

Ø  Short term loan to meet their working capital requirement

Processors

Ø  Long term loan to create fixed assets i.e. land and building, machineries, equipment’s

Ø  Long term loan to construct warehouse, sheds etc and transportation

Import loan to procure raw materials/short term loan to meet working capitals, operating expenses etc

Ø  Leasehold & warehouse financing

Ø  Other causal loans i.e. for licensing, financing in human capital etc.

Wholesaler/Retailer/HIMCOP

Ø  Short term loan to purchase the finished goods & stock from the small scale producer, processers etc./Receivable/stock financing

Ø  Export loan to supply the goods to India and Niche Market

Ø  Long term loan to construct warehouse

 

Currently most of the above loan products required for the value chain actors are available, issues is access to the actors only. Apart from the above below product needs to be developed,

Ø  Long Term Lease finance to procure machineries, equipment’s etc.(not available)

Ø  Warehouse receipt financing due the absence of necessary policy in Nepal (not available)

Ø  Flexible loan product i.e. flexy loan that ensure borrower to repay the loan after realization of sales proceeds which means matching of repayment with cash flow of the borrower. For this related policy/procedure from both regulatory as well as respective financing partner to be prepared/implemented. 

Interventions to be required for further development of sector

 

Ø  Building the capacity of input suppliers, farmers, processors, cooperatives and related organizations including the Central Tea Cooperative Federation (CTCF), Himalayan Orthodox Tea Producers Association (HOTPA), Himalayan Tea Producers Cooperative (HIMCOOP), and National Tea and Coffee Development Board (NTCDB) to increase production and enhance competitiveness;

 

Ø  Support in product diversification, market diversification, and promotional activities;

 

Ø  Support in establishment of nurseries, composting plants, demonstration plots, training centers, collection centers, link roads, blending facilities, central warehouses, maintenance units, auction markets, and market information centers;

 

Ø  Support in organic and other international certification, packaging materials, development of quality technical manpower, creating an industry database, geographical indicators, tea tourism, piloting of plucking machines and irrigation systems, and upgrading laboratories;

 

Ø  Research on Nepal’s own blend, quality needs assessment, and development of norms and standards; and Lobby for duty concessions in inputs and packaging materials.

 

Ø  Formulation of related policies from regulatory authority, Nepal government for lease finance and warehouse receipt finance,  Auction Market and Accredited Agency for warehouse management

 

Ø  Introduction of mobile/branchless banking for access to finance to the small scale farmer, input suppliers who still is in absence of formal banking system.

 

Ø  Government intervention in pricing, marketing, import/export (to stimulate the sector not for control) in this sector until Nepalese Orthodox Value Chain system get strengthened/properly established.