Tea is a major export from Nepal (Department of Customs 2023) and Nepal Trade Integration Strategy (NTIS) has identified it as one of the priority agricultural export products (Ministry of Commerce, Industry and Supplies 2023). Smallholder farmers have a major contribution in tea production in Nepal. Out of the 9,235 farmers and enterprises involved in commercial tea plantation in Nepal, 9,127 (98.8%) are smallholder farmers (82% of whom farm in less than one hectare) while 108 (1.2%) are large tea estates (Central Bureau of Statistics & National Tea and Coffee Development Board 2019.

Smallholder farmers’ crop diversification towards the inclusion of cash crop, such as tea, in the production mix is considered a logical intermediate step in the structural transformation of agriculture away from the subsistence-based model (Todaro & Smith 2016). Meanwhile, from an industrial perspective, with the rising cost of primary production, large tea estates are restructuring themselves to incorporate smallholder tea farming as an important contributor in their business model. Smallholder farming model is taken as an efficient mode of production, especially in the countries with strict labour regulation and strong labour unions, as the liabilities towards labour are the least under the model (van der Wal 2008).

Smallholder farmers, although contribute significantly to the upstream value chain, face in general the problems of lack of capital, low farm-gate price for tea leaves and resulting indebtedness (to leaf collectors), poor access to credit, limited access to technology and market information, and lack of technical knowledge among human resources (van der Wal 2008; Gakaria 2015; Sita, Hariadi & Subejo 2017; International Labour Organization 2018; Katuwal 2020). In this context, this study analyses the challenges faced by smallholder tea farmers of Koshi province and their responses to mitigate those challenges, based on qualitative descriptive design using data collected through in-depth interviews and focus group discussion with smallholders, key informant interviews with government authorities and industry experts, and two multistakeholder dialogues held in the years 2022 and 2023.

The study finds that smallholders, who are important partners in upstream value chain, are not well-compensated for their tea-leaf-production. This has resulted in loss of motivation among farmers towards enhancing the quality of production, including going organic. Importantly, farmers are finding it challenging to sustain their farming with low output price amidst the increasing production cost. This study further explores the case of smallholders establishing their own small-scale factories with support from state and development partners, aimed at resolving the perennial problem of low price of tea leaves. In many cases, this initiative by farmers pushed price of tea leaves to higher level but fresh problems, pertaining to low product quality and missing market, emerged post-processing. Besides, smallholders organised themselves in form of cooperatives to increase their bargaining power to solve the pricing problem. While cooperatives hold the potential of success, they are constrained by a lack of proper implementation of state policies, originally brought to facilitate their growth. The findings suggest that smallholder farmer model, although considered an efficient model of tea production, has been facing challenges which threaten their long-term sustainability unless there is proper coordination and fair value-sharing among the upstream and downstream value chain partners.