Tea industry's future looks optimistic

Dr N. Yogaratnam

Tree Crops Agro Consultants

Global tea prices are likely to ease next year on higher output with weather patterns returning to normalcy in the main tea producing regions of Asia and Africa, says the FAO in its latest report. Global tea prices hit the roof in 2009 due to production shortage.

India

However, Global producers are not willing to buy the FAO forecast. India, a leading tea producer, says that it is likely to drive tea prices up, as the current year's 65 million kg shortage is not going to be made up so easily.

Added to it, a year-on-year consumption growth of about 30 million kg in India alone (consumption is presently about 800 million kg and production about 960 kg), and therefore it appears that prices will remain strong.

The shortage in the system will not be made up, even if the crop is very good. They also say that they are confident of the Indian story and about Indian prices driving global prices.

The FAO Tea Composite price, the indicative world price for black tea, reached a high of US$ 3.18 kg in September and October, amid droughts in India, Sri Lanka and Kenya, underpinned by increased demand, compared to an average price of US$ 2.38 per kilogram in 2008. The concern that FAO is raising is that tea producers could over-react to the current high prices by planting more crops.

The Indian industry sources say that the global shortage is 165 million kg now.

The new year is expected to be very optimistic in outlook. Even if prices hold out at the current level, it's still very good. Overall, the long term trend in India is very positive, given their consumption figures. In tea, they are still exporters, but that situation is expected to change.

In seven to 10 years; they could become net importers. The scenario looks very positive because of the India story. It is going to make a difference on global prices like sugar and some other agricultural commodities.

The basic premise of the confidence level among Indian producers is a growing consumption at three percent on a year-on-year basis, which negates the FAO perception that tea prices would ease next year on higher estimated output.

The short rains in Africa were not as good as expected. Consider the statistics: India is likely to end the year with a shortage of 65 million kg.

Factoring in a pipeline shortage in other tea producing countries, like Africa and Sri Lanka, the shortage is expected to be around 165 million kg. According to official figures during January- September, world tea production stood at 1,275.5 million kg, down by about 89 million kg.

FAO has said there may be more plantations in the major producing countries in Asia and Africa. But, it has been said that some producing countries, such as India, have acted responsibly and announced that they would not be expanding current tea areas beyond what is required for replanting and rehabilitating existing tea gardens. Sri Lanka is also not expected to expand their tea cultivated extent. In fact some of the marginal tea lands are going into rubber.

On global consumption, FAO says the global growth in tea consumption outpaced production between 2005 and 2009 - a 0.8 percent surplus of production had got converted to a deficit vis-a-vis consumption of 0.6 percent.

The gap between consumption and production growth was largest between 2007 and 2009, when it reached 3.4 percentage points, coinciding with the surge in prices.

FAO noted that elevated tea prices did not affect consumers in the developed countries because of intense competition in the beverages market and some of the price increases were passed along the value chain to consumers, as retail prices increased by only five percent across supermarkets in Europe.

However, in the developing nations, manufacturers are likely to transfer a large share of the price increase to consumers as tea procurement costs account for a significant part of the final retail price. In India, average retail tea prices were quoted about 15 percent higher in September than in the same month in 2008. While in Pakistan, retail prices increased 12 percent in September 2009 compared to September 2008. In Sri Lanka also, similar increases were seen.

Kenya

Kenyan tea prices hit a new record very recently of an average US$ 5.30 per kg for the Best Broken Pekoe Ones (BP1s) from US 5.23, at a recent sale according to Reuters based on a regular market report. Kenya, the global leader in black tea exports, has seen prices rise this year as drought has cut back production by about 20 percent. The average Best BP1 price has risen 93 percent this year from US$ 2.74 per kg at the first auction in 2009 when they fetched between US$ 2.82 and US$ 2.65 per kg.

The average price for Best BP1s sold at between US$ 5.22 and US$ 5.38 per kg at a recent auction (November 17, 2009). Those of top Pekoe Fanning Ones (PF1s) stood at US$ 3.76 to US$ 3.68 per kg. There was strong general demand for the 97,004 packages (6.1 million kg) on offer. Some 10 percent of the tea on sale, however, remained unsold. Egypt's packers sector dominated trade while Afghanistan lent strong support and increased interest from Britain, Sudan and Pakistan packers were also active.

Sri Lanka

The profitability of the Sri Lankan tea industry, like any other plantation, rests heavily on the movement of global market and production costs. The industry has had its ups and downs.

The global economic meltdown at the end 2008 had a disastrous effect in freezing of the tea purchases by international buyers which resulted in Sri Lankan tea remaining either unsold or fetching very low prices. However, with global economy showing signs of recovery by mid this year, drought in early part of this year and the labour agitation in September for higher wages enabled Sri Lankan tea industry to recover with inflated tea prices being fetched at the auctions due to improved economy and restricted supply.

Tea production has shown a decline of 14.4 percent at end October this year in comparison with the same period in 2008. The production in January - October 2009 is 234.8 million kg while in the same period in 2008, it was 274.4. If this trend in production continues until end of this year, our production would stand around 272.8 million kg as against 318.7 in 2008.

The industry is optimistic about the outlook with average tea prices now in Colombo being around Rs 385 to Rs 450 per kg. at the auctions. The steady increase from about Rs 200 per kg in 2008, to around Rs 450 per kg in the same period this year, in low grown teas has provided an impetus to the Sri Lankan tea industry.

But the cost of production is a different story altogether. Sri Lanka's cost of production has been recording steady increases from around US$ 1.75 per kg to around US percent 2.04 now, which is well above that of Bangladesh (US$ 1.35) India (US$ 1.25), Kenya (US$ 1.00) and Vietnam (the lowest at around US$ 0.75 per kg).

Three possible ways available for the producer to enhance profitability are: to fetch attractive prices for their produces, to increase their productivity level and to reduce the COP. There are several avenues open to improve profit margins even in the face of increasing costs, through wage hikes being granted in response to work force agitation, which are unavoidable. The go-slow campaign followed by work stoppage in some estates has compelled the management to grant a minimum daily wage increase from Rs 295 to Rs 405, a 40 percent increase which is expected to be linked to productivity. This is expected to be an additional burden which the industry is expected to bear, despite their current high COP level.

Long term perspective

In the final analysis, one way to shield against global "boom and doom" cycles and enhance bottom lines is to increase value-addition. One only has to look at the price differentials as the value addition scales move-up. The corporate sector has been steadily progressing into value-addition, yet much remains to be done, besides improvements in the marketing system Despite unprecedented volatility in tea market that was seen globally as well as in Sri Lanka in 2008, Sri Lanka's tea market is now expected to be stable possibly with restricted supply. Drought is a natural phenomenon that had been a perennial problem over which we had very little control. Labour unrest in plantations, is also another worry, but total elimination under the present context will be a huge task to the management as this has political dimensions.

Nevertheless, inconsistency in crop production should be arrested in order to minimize tea market volatility. Tea, being a climate sensitive crop, plantations should adopt mitigation / adaptation measures for it to retain its leading position in the domestic economy. Fluctuating weather patterns can cause inconsistency in cropping. Water and temperature, whether too little /low or too much /high are constraints to tea cropping.

Plantations in the low and mid-country, which together account for about 76 percent of the tea production in the country, are the most vulnerable areas that have to survive the wrath of climate change. Rise in temperature is likely to adversely affect the quality of tea at high and mid- elevations, with the absence of the traditional flavour.

To a large extent, the effects of these initiatives are expected to mitigate/adapt to the challenges arising from fluctuating markets for tea and ensure optimistic out look for the Sri Lana's tea industry.