Tea prices have shot up this year on account of dry weather conditions during the early part of the year followed by floods in Assam.
Given the rather delicate demand-supply scenario, it appears that tea aficionados will have to shell out more for their morning cuppa in future as well. Tea production in 2012 may remain around the 2011 pan-India figure of 988 million kg.
In January-July 2012, production was 4 per cent lower compared with the corresponding period last year. As a result, with demand growing steadily, the average price of black tea was 10 per cent higher during this period. In July alone, prices were up by 18 per cent year-on-year.
This upward trend in prices will persist in the foreseeable future. Indian black tea auction prices (average of North and South India) are expected to remain above Rs.100 a kg throughout this decade (2011-20) as compared to an average price of Rs.73 a kg during the previous decade because black tea demand will continue to outpace production globally.
Production is not expected to catch up with consumption during this period because the pace of re-plantation is slow, and there has been no notable increase in acreage in leading producer-nations in the past few years.
The effect of these factors on prices can be compounded by climatic or local issues in any of the three key tea producing countries — India, Sri Lanka and Kenya — that can also acutely damage the overall market equilibrium.
The production-consumption imbalance is already grave. This is evident from the fact that inventories in India have declined from 4.7 months of domestic consumption at the beginning of 2007 to 2.1 months’consumption in 2011. The last time India’s inventory level was at a comparable low was in 1995, when it was around 3 months consumption. In Kenya too, inventories have been declining by 17-22 million kg every year since 2008.
The increasing skew in favour of consumption began to manifest itself from the middle of the previous decade. During 2006-11, global black tea production grew by 2.1 per cent compounded annual growth rate (CAGR), whereas consumption grew considerably faster, resulting in depletion in inventory levels. Adding to the supply risk in future is the fact that global black tea production is highly concentrated, with India, Sri Lanka and Kenya together accounting for 60-62 per cent of the total black tea supply. Sri Lanka and Kenya export 90-95 per cent of their black tea output as the domestic market is miniscule. India, on the other hand, is the largest consumer of black tea, and typically exports only 17-20 per cent of its produce.
What will compound the supply problem and mount pressure on prices is the lack of substantial increase in tea acreage in these three countries or in other black tea-producing nations in the last five years. In addition, although productivity is high in Kenya as the tea bushes are young (age less than 50 years), there has been no appreciable upswing in productivity in India and Sri Lanka. India’s productivity has not improved as re-plantation of old bushes (age more than 50 years) has taken place at a very slow pace perhaps because high tea prices during this period discouraged planters from going in for re-plantation.
Falling inventory levels and increasing domestic consumption coupled with relatively slower growth in production will affect India’s tea exports.
With insignificant new area added for tea cultivation, the increase in production will largely be due to 25,000 hectares of old bushes that were re-planted during 2006-11. Domestic tea production is expected to increase by 1.6 per cent CAGR over the next five years, while domestic demand would grow at a slightly faster pace of 1.8 per cent CAGR.
Since inventories are already at very low levels of two months consumption (in 2011), the possibility of a further decline is low. A portion of the black tea that is exported will be redirected for domestic consumption. Exports are, therefore, expected to come down to 127 million kg in 2016 from 192 million kg in 2011.
This shift might not significantly affect the profitability of Indian players as Indian tea prices are on a par with global prices for the same quality. All in all, it promises to be a fruitful decade for the tea industry. The same cannot be said for consumers.
The author is Director, Crisil Research, a division of Crisil.
The author does not seem to account for an increasing cost of
production (out of which about half is human-related costs) over the
decades when he looks at rising prices of tea. I guess inflation in
cost of production, and increasing wages, does not concern the author
- in his opinion, price is only a function of quantity of demand and
supply, not the price of these at all.
How much of slow growth in supply (or acreage under tea for that
matter) is due to the lack of remunerative prices for the stake-
holders (especially the producers and the people employed in
production) over the decades?
I trust consumers have been paying more for their consumption of other
products and services over the decades? Other products in the
consumption basket have gone up by much larger amounts over the same
period, and tea has a lower portion of that basket now. Incidentally,
the cost of tea in a tea-cup is only a small portion of the total cost
of making a cup of tea (milk, energy are larger costs)
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