CITY GRUMP
The last time I was in Sri Lanka was in 1981, just before the long, long civil war broke out. I tried again in 2001 but the Tamil Tigers succeeded in blowing up six Sri Lankan Airways planes at Colombo airport, so that was that holiday out the window.
Mission Control and I finally succeeded in getting there last month. It is a beautiful and fascinating Island. Some things have improved. The roads are much better, there are many superb places to stay (we can recommend The Notary’s House, Rosyth Estate also graced by one Jeremy Hunt and family, Camellia Hills and Mosvold Villa), people seem more optimistic and there are more better quality buildings dotted about.
What has not changed is the business of tea. My favourite cuppa comes from the wonderful Ceylon (yes they still call it Ceylon in the tea world). Broken Orange Pekoe, for which I fork out nigh on £40 for half a kilo on our Island. In Sri Lanka I can buy the same tea from the factory for 850 rupees, which is approximately £2.30. That is 5%, yes 5% of what I pay here in Blighty.
This is crazy and what it tells us is there are far too many middlemen taking a cut before the amber nectar goes down our throats. By way of comparison in the labour intensive wine industry the producer gets 20-25% of the retail price and actually more if you knock out HMRC’s slice.
What is going on here? Well, the following from Fairtrade’s website begins to touch on it:
The challenge of securing higher prices for farmers is significant given how pricing works in the tea industry. Tea is unusual among agricultural commodities in that it is sold through auction centres around the world (around 70% of the world’s tea is traded through auctions). Unlike coffee and cocoa, there is no futures market for tea. Although the system appears to be a fair market in which prices are determined solely by supply and demand, a small number of companies dominate sales at each auction. The large companies have such purchasing power that they can often influence the demand, and thus price, of particular qualities and types of tea. Brokers and buyers have sometimes colluded to influence prices, lowering the price received by farmers; in 2005, the situation became so bad in Kenya that the National Chamber of Commerce called, unsuccessfully, for the elimination of tea auctions. What this means is that middlemen can take a large slice of the price paid by the factory for the growers’ tea.”
To be rather more explicit: The tea factory sells the tea at auction, the buyers blend, pack and market the tea, which is then transported to the retail brands, who sell it onto the retailers who sell it on to us. And right at the start of this ancient practice, the Sri Lankan tea picker, who is out in all weathers all day long, is paid a magnificent 1,000 rupees a day or £2.70 in our money.
Surely this can’t go on, so I put this question to my tea retailer. I will spare their blushes as to who it is but suffice to say they have been known to supply the House of Windsor. Here is part of their reply:
As a small retailer, we acknowledge the challenges in the tea industry, particularly the vast imbalance between origin countries and the UK retail market. We strive to provide good quality tea from reputable gardens and work with suppliers to ensure fair wages and proper working conditions. However, we also recognise our limited impact on the broader industry due to our size and reliance on suppliers and importers.”
Well, at least they recognise there is a problem. And it’s a big one. Consumption of tea is dropping all the time. One way of addressing this is to cut the cost to consumers, actual and potential. One way of doing that is to end the dubious auction process.
How do you do such?
By getting the retail end to contract directly with the producer as so often happens in the wine trade and many other agricultural industries.
As I write this, the price of coffee beans are the highest on record. An ideal opportunity for the tea industry to strike back through efficient pricing practice. You never know, then they might even be able to pay the poor benighted tea picker rather more than a joke of a wage.
The City Grump has spent some 40 years in the City of London. He started as a stockbroker’s analyst but after some years he decided he was too grumpy to continue with the sell side of things so he moved to the buy side and became a fund manager for the next 20 years, selling his own business in the 1990s. Post the millennium, he found himself in turn chairing a stockbroker, a financial PR company, and an Exchange. He still keeps his hand in, chairing a brace of VCTs and investing personally in start-ups. The City Grump’s publications are available here.