STiR coffee and tea magazine

46 STiR coffee and tea / Issue 5, 2020 (October / November) Most of the reporting focus is thus on seasonal and annual operating profitability, this year's tightrope walk. The measure of health here is free cash flow (FCF): the funds avail- able for distribution to owners, repayment of debt and, most key, investments that directly improve operations, productivity, trade, and sustainability. FCF is not the same as profit, which is affected by many non-accounting deductions, like depreciation, accruals, and defer- rals. NFL teams are experts in reporting an accounting loss while piling up the real money that drives up their value, but tea production is very much a cash-crop business. In many instances, there's a gap between sale and cash — payments from sales and auctions, trade finance of exports, and purchase of seeds and fertilizer in advance of harvesting and revenue. There's an even deeper problem that seems likely to change the structures of the indus- try: the cost and availability of longer-term financial capital. The dilemma is that most of the methods, technology, and bio-management that helps improve revenues and operating costs demands funding that does not provide immediate returns and that is unaffordable for most producers. A relatively few firms at the retail and service end of the value chain can attract angel investors or acqusition by large companies with strong financing capacity. Startups like Chai Point in India raise capital — $33 million in this instance — from private investors. Most tea companies must finance growth from debt. Around 2010, this was fairly easy to get. The tea industry was on a track of continued growth of 4-7% a year. New markets opened up, especially among Asia's increasingly affluent and trend-seeking millennials. The wellness market was beginning to surge, with herbal and green teas expanding variety and quality. There was a potential cornucopia of new products such as bubble and cheese tea. It wasn't a rosy scene but a fairly robust one, and most commentaries as late as 2018 focused on the positives, especially at the consumer end of the value chain. Loan interest rates reflected confidence. In 2011, for instance, the interest rate on gov- ernment agency loans to Sri Lankan tea farms and factories was below 10%. In 2017, it was over 15%. In 2019, 15 factories that had been supported had closed; 30 were classified as NPL — non-performing loans — whose repayments were put off for 1-2 years. In Rwanda, whose tea industry has been expanding and where government support has been strong, interest rates doubled from 2012 (8%) to 2014 (15%). In 2010, the Na- tional Agricultural Board encouraged tea farmers' cooperatives to take on heavy loans from the Development Bank of Rwanda to invest in processing factories and increase production, with debt. The debt would be repaid from the resulting crop revenues. These did not materialize, with droughts and floods adding to export competition and price ero- sion. By late 2019, farmers organized appeals to wave the loans. One cooperative illustrates the scale of the problem. Its thousand smallholders owe $3 million, of which $1 million is accrued unpaid interest. The cooperative only paid off $100,000 of the principal and the total is expected to accrue to $8 million. The original interest rate of 8% is now 16%. Other borrowers are paying 19%. Many of these problems relate to the pandemic that has hit every tea growing nation, but they also reflect longer-term structural issues. Climate change has led to volatility and uncertainty on crop production volumes, and the gap between supply and demand has had the same effect on prices. In Assam, operating costs grew by 7-10% a year but prices only by 1%. Industry asso- ciations have asked for major subsidies on debt and long-term financing to offset their ero- sion of margins. Representatives from Pakistan's farmers met in August 2020 with senior government officials to "demand" interest-loan loans. They highlighted agriculture as the mainstay of the economy, efforts to diversify into cash crops and the rising costs of seeds and pesticides. They proposed that $300 million be set aside for the betterment of farmers. However sympathetic one may be, it seems totally unrealizable. The government must raise the funds — in effect, borrowing to enable lending. Pakistan's bond yield at this time was over 9% and rated as a weak B- with a predict 10% probability of default within the next few years. If farmers are not generating profits today, and there are no positive signs of major market shifts, how will they be able to repay the debt? How can a strapped gov- ernment absorb the losses? One key element of short-term capital covers the gap between production, sale, and re- ceipt of payment from the contractor, auction buyer, wholesaler distributor, or other party in the supply chain. The key players here have long been private banks in handling the domestic elements and various types of agencies in providing trade finance and acting as There can be a long gap between investment and payoff.

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