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Agriculture | Indonesia’s Tea Industry: Bitter Supply Amid Sweet Demand

Indonesia has historically been a major tea producer as well as an increasingly large-scale consumer. Indonesia’s tea industry faces a number of obstacles from ageing plants to climate change that have led to lower productivity as well as poor profitability which has prompted many smallholders to switch to other commodities. That being said, there has been an increased demand for tea in recent years, especially from the domestic downstream industry, which should play a role in supporting the Indonesian tea industry to regain its past glory.

Indonesia’s Tea Industry: Bitter Supply Amid Sweet Demand
Due to mismanagement and the lack of new investment, the country’s tea sector has been suffering setbacks since the early 2000s which has been marked by a decline in production

Declining production, growing demand

Indonesia has a long history of tea cultivation which can be traced back to the Dutch colonial era. Unfortunately, due to mismanagement and the lack of new investment, the country’s tea sector has been suffering set backs since the early 2000s which has been marked by a decline in production.

Based on plantation statistics data from 2014, Indonesia has a total tea plantation area of 121,034 hectares. West Java province has the most tea plantation areas with a total of 89,978 hectares or around 73% of total national tea planted areas and supplies around 70% of the country’s tea production. Most of these plantations are owned by smallholders (50.96%), followed by state-owned plantations (25.80%) and private plantations (23.24%). Other tea producing regions in the country are Central Java and North Sumatra.

According to the Food and Agriculture Organisation, Indonesia has not been able to catch up with other tea producing countries in terms of production, particularly India and Sri Lanka, for the past decade. India and Sri Lanka each produce an average of 1 million and 329,000 tonnes of black tea per year with an annual growth of 1.2% and 2.5%, respectively. Meanwhile, Indonesia only produced an average of 147,000 tonnes per year with an annual decline of 1.7%.

The Indonesian Tea Association (ATI) recorded that the country’s tea production has been declining since 2001 due to the gradual reduction in planted areas at a rate of 1,113 hectares a year. In 2005, for example, Indonesia produced 166,000 tonnes of black tea. Ten years later, that figure was down to 130,000 tonnes. This was only 2.5% of global tea production which equated to 5.2 million tonnes. As a result, Indonesia now only ranks 7th among the top ten global tea exporting countries; below Sri Lanka, Kenya, China, India, Vietnam, and Argentina.

Meanwhile, the world’s demand for tea is growing at an average rate of 0.6% a year. In 2015, tea producing countries exported 1.75 million tonnes or 34% of their total harvest. Indonesia contributed around 70,000 tonnes or 4% to the world’s tea export market which generated foreign exchange revenue of approximately 2 trillion IDR annually. Most of the tea that is exported is in the form of powder. Only around 6% is exported in the form of processed products. The country’s major export destination countries are Malaysia, the United Kingdom, Russia, and Pakistan, followed by the United States, Germany, United Arab Emirates, Ukraine, the Netherlands, and Poland.

The majority of the tea exported to overseas countries are of high-quality tea leaves, therefore leaving only medium to low-quality tea leaves for the domestic market. There has been an increased demand from Indonesia’s domestic market in recent years, especially from the beverage industry where packaged, ready-to-serve tea drinks have been quite popular among the country’s youth (See Thirst Quenching: Indonesia’s Food & Beverage Industry). According to the ATI, the total sales of domestic processed tea products reached an average of 10 billion IDR on a yearly basis which is five times higher than that of exports.

Unfortunately, the lack of supply has prompted the domestic downstream industry to resort to imports to keep pace with the growing demand. In 2014, Indonesia imported 24,000 tonnes of tea. To protect the local tea plantation business, the government increased the import levy from 5% to 20% in 2015. This policy has successfully curbed tea imports by half to 12,000 tonnes.

Stiffer challenges and competition

One of the major constraints hampering the tea industry’s growth in Indonesia is a decline in production. This is mainly due to the fact that smallholder farmers, who make up the majority of tea plantation owners in Indonesia, consider the tea business as no longer profitable. As a result, many tea growers have switched to other crops such as palm oil (See Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth) or vegetables (See Indonesia’s Horticultural Sector: Fruitful Opportunities Waiting to be Realised).

The reasons behind this decision are multifaceted, from ageing plants, shrinking land ownership, lack of skills and knowledge of best agricultural practices and technology, to climate change. These factors have dramatically reduced the productivity and profitability of tea plantations in Indonesia.

According to the Ministry of Agriculture, the majority of Indonesian tea plants are old and in poor condition. The average productivity level for tea is only 900 kilogram/hectare, far below the ideal figure of 2,500 kilogram per hectare. Moreover, the average land ownership of each smallholder is comparatively low at only 0.6 hectares.

The lack of skilled human resources with knowledge of best agricultural practices as well as technology has resulted in poor quality products. That is why Indonesian tea prices, especially from small plantations, are cheaper. For example, the average tea price at three auction sites (Colombo, Kolkata, Mombasa) in 2015 was $2.70 USD per kg. In contrast, the average price of Indonesian tea at the KBP Nusantara in the same year was around $1.50 – $1.70 USD per kg.

The Indonesian tea price is lower because a large proportion of tea products are sold unbranded; moreover, high intensity rainfall has also reduced their taste and quality. Most importantly, some of the country’s tea products have a high anthraquinone level which is considered an issue in the European market.

Other challenges that contribute to the decline in Indonesia’s tea production are weather and climate change. There has been an increase in temperature in tea producing areas, including in Puncak, Bogor, West Java, due to climate change. The ideal temperature for tea cultivation is 25°C. Every 1°C increase in temperature reduces tea production levels by 5%.

The El Nino occurrence has also impacted tea production in 2015 and 2016. According to the Ministry of Agriculture, El Nino was responsible for the decline in tea production by 15% to 30% in 2015, especially during the months of October and November, where some tea plants stopped producing any yield due to this weather occurrence.

Furthermore, the increase in labour wages (See Labour Pains in Indonesia) and logistics costs (See Indonesia’s Logistics Sector; Making Connections) have further reduced the competitiveness of the Indonesian tea industry. This was used by Vietnam and Sri Lanka, two major competitors in the international tea market, to capitalise on Indonesia’s market share in numerous export markets. The former even went further by exporting tea to Indonesia and competing head-to-head with local tea producers. Vietnam has an advantage because as an ASEAN country it is exempted from import duties (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?).

Mr Alwin Arifin
Sriboga Raturaya
Mr Alwin Arifin
Wheat Flour, Baked Goods & Food Services
Of equal importance are the logistics requirements for food-related industries and services alone that are challenged by the distribution requirements of 17,000 islands but also pose a unique opportunity for double-digit growth.
See Interview Learn more about Sriboga Raturaya

Increased government support needed

Since 2013, the Ministry of Agriculture has allocated an annual budget to revitalise domestic tea plantations through intensification and rehabilitation programmes such as seed and fertiliser distribution. According to the Indonesian Tea Board, the total allocated budget for the programme in the last two years reached 90 billion IDR for 3,000 hectares in ten districts.

Many tea producers, however, consider the budget as too low compared to that allocated for cocoa growers (See Indonesia’s Cocoa Industry: Lack of Supply Still Hampers Growth and Investment). After all, other national governments, such as in China, Kenya, Sri Lanka, and Vietnam, have been generous in supporting their local tea plantation owners which have enabled them to better compete in the global market (See Indonesia SMEs: Increased Government Support to Overcome Challenges).

Local Indonesian tea producers have also expected the government to provide more support and resolve various issues hampering the industry, including local tea’s high anthraquinone level. Until now, the reason behind this issue has not yet been determined to see if the root lays in the processing or in the packaging procedure.

Other governments, such as India, have lobbied the European Union to allow their tea producers to export tea to the continent despite having high anthraquinone level. Indonesian tea producers have demanded that the Indonesian government to do the same (See Indonesia and the EU CEPA – Deal or No Deal?). They also asked the government to implement non-tariff barriers, such as halal certification or recommendations from the Indonesian Tea Board to curb tea imports from countries having free trade agreements such as Vietnam (See Indonesia and the Trans-Pacific Partnership – Worth the Membership?). Moreover, many plantation owners have demanded that the government provide training on good agricultural practices including producing better seedlings, which are able to adapt to warmer temperatures.

Prospects ahead remain bright

Despite many constraints, the prospects for the Indonesian tea industry remain bright. Tea consumption in Indonesia is projected to grow by nearly 3% per year over the next decade. Many forecast show that the future of the country’s tea industry lies in the domestic market and not in the export market. Indonesia’s local tea producers have not yet fully tapped the potential of this market, despite having a huge population of more than 250 million people.

In addition, Indonesian tea consumption per capita is still low, which gives plenty of room to grow. In 2014, for example, the Indonesian population only consumed an average of 0.32 kilogram of tea per capita. This is lower than the global average of 0.57 kilogram and far below major tea consumers like the United Kingdom and Turkey who consume 2 kilograms and 7.54 kilograms of tea per capita, respectively.

It is therefore no wonder that the local processed tea and beverage industry has to resort to imports to meet growing domestic demand in recent years. According to the Association of Indonesian Soft Drink Industry, tea-based drinks currently account for 10% – 13% of all non-alcoholic beverage in the ready-to-drink market. Further areas of exploration for Indonesia’s tea industry lays in the food and baked goods industry (See Wheat Gains in Indonesia – Downstream Opportunities on the Rise) given the popularity of tea as a flavouring for products such as cakes, doughnuts, ice cream and many more. Indonesia thus has the opportunity to revive a long neglected industry and take advantage of its local market which has a natural inclination to tea and tea flavoured products. Branding and packaging continue to be critical areas where the country falls short and lay behind the lack of branded Indonesian tea products which means both farmers and consumers are missing out on a significant opportunity that is part of Indonesia’s heritage.

Global Business Guide Indonesia - 2016

icone share

Indonesia Agriculture Snapshot

Contribution to GDP: 13.88% (Q3 2015 including Fisheries & Livestock)
Number Employed in the Sector: 40.12 million (February 2015)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.