Tea prices projected to ride high in 2011

Tea prices are governed by supply and demand. Over the years, the world supply of tea had been running ahead of demand resulting in the fall in the real prices of tea. This traditional scenario is now being reversed.

During the last four years, there has been a resurgence in global tea consumption. This has led to demand outstripping supply which drove the tea prices to spectacular levels as shown in the table.

Upsurge in world tea consumption

The main reasons attributable for the growth in world tea consumption are:

Rising world population and income levels.

Switching over to tea from other beverages during the 2009 recessionary phase which continues to remain after recovery from recession.

Increasing awareness of the health and wellness aspects of tea.

Significant upturn in tea consumption in China and India due to growth of their economies. The per capita consumption of tea had been very low in China and India. In China it was around 0.58 kg and in India it was 0.69 kg. In contrast, the per capita tea consumption in Sri Lanka is 1.39 kg. China and India with their huge population and growing income levels are making a major impact on the rise in world tea consumption.

Sluggish rise in world tea production

As against the upsurge in world tea consumption, world tea production has been trailing behind. For the evaluation of the trend in tea production, 2009 may have to be excluded as it was an unusual year beset by unprecedented global recessionary downturn.

The table shows the production of tea in 2010 compared with 2008 in the major tea producing countries where statistics are available.

The statistics demonstrates that, except for Kenya, the other major tea exporting countries have shown a declining trend in production in 2010 compared with 2008. As the demand has outstripped supplies, tea prices continue to remain buoyant.

Steep fall in tea production in India

Tea production in India is not likely to recover in the remaining months of the year. The continuance of excessive rains in North India and pest attacks have crippled India’s tea output.

India produced around 990 million kilograms of tea last year. It is projected that tea production in India is likely to fall by about 20% in 2010/2011. This will be a huge downturn in world supplies which are unlikely to be compensated by an increase in production in other tea producing countries.

It would appear that the global tea output may end up in a deficit at the end of this year. But the global market needs an extra 200 to 300 million kilograms of tea to keep pace with the rise in tea consumption.

All these factors add up to the projection that tea prices will ride high in 2011.

Domestic value-addition for tea exports

Value addition is normally defined as the difference between the value of the final product and the amounts paid for factors of production. For domestic value-addition of tea, the formula traditionally used in the tea sector is as follows: Value added to tea = Final FOB price minus the cost of tea minus cost of imported inputs used for processing of the export product.

According to the above definition, almost all Sri Lanka’s tea exports could be considered as value-added teas. This would include blended bulk tea as well.

The international classification of tea packets as shown in the Annual Bulletin of Statistics published by the International Tee Committee (of which Sri Lanka is a member), classifies that tea packets are packs not exceeding three kilograms.

India, Indonesia, United Kingdom, Germany, USA and several other countries follow the same statistical classification.

They classify packs over three kilograms as bulk teas.

 However, packs over three kilograms, though termed as bulk tea, are also value-added teas if they are blended and repacked to meet the needs of the overseas markets.

It has to be reckoned that, in the tea industry, there are many stages of domestic value-addition from the purchase of teas at the auctions to the shipment of teas.

 Branding, labelling, packing and blending are some of the downstream operations before the export product is shipped.

Each of these operations in the value-addition chain has its own costs and margins which are added to the ultimate export price.

It has to be reckoned that brand image comes foremost in the chain of value elements and the maximum return in the value-addition operation is generated through Sri Lankan brand ownership.

(T. Sambasivam was a long-standing Deputy Director General at the Sri Lanka Tea Board whilst he also worked previously as an Accountant at the Ministry of Finance. Currently, he is a Group Consultant to a leading tea firm in Sri Lanka.)