Lockdown impact: Tea firms see huge price surge in May due to scarcity

The shortfall in March and April has been exacerbated with the panic purchase of 50 million kg of existing inventory

Given the production shortage owing to the lockdown and panic buying helping clear the stocks, tea plantation companies are expecting a major price surge in May once the second flush season begins.
 

Industry officials noted that during March-April, there has already been a shortfall of around 90 million kg (mkg) and nearly all of the 50 mkg tea stocks have been sold.
 

This is because packaging companies sought to buy whatever tea was available, anticipating a lockdown extension and the resultant consumer demand. “There is practically no tea in the system now and only some production is there by south Indian companies. Given this situation and the production loss already incurred, prices should be healthy once tea starts hitting the market again,” Atul Asthana, managing director of the Goodricke Group, told Business Standard.
 

Major producing states like Assam and West Bengal have allowed plantation activities to commence. This should ideally help production and tea return to the eco-system. Major companies are of the view that there will be no production this month. Assam accounts for over 50 per cent of the total tea produced in the country while West Bengal accounts for 27 per cent.
 

“Production loss has already been incurred and even if plantations resume operations, there will be practically no tea available,” D P Maheshwari, managing director at Jay Shree Tea and Industries, told this newspaper.
 

Vivek Goenka, executive director at Warren Tea, said owing to estate closures before, the bushes are already overgrown and skiffing needs to be done first before any production can take place. This skiffing acitivity usually takes 7-10 days but may stretch longer, given the limited manpower availability.
 

While Assam has sanctioned a maximum of 50 per cent of the total workforce in an estate at a time, the allowed limit in West Bengal is even lower at 25 per cent. “Usually during this time, we need to deploy the entire manpower available with us but now I don’t know how effective production and skiffing activities will progress, given the cap on manpower,” Maheshwari added.
 

Ratings agency ICRA said it expects tea estates to substantially reduce the number of temporary workers during the period of low production.

“Nonetheless, the impact of a reduction in production, because of fixed costs and loss in contribution, is estimated to increase the cost by nearly Rs 15 per kg on the balance production during the rest of the year.
 

This is after assuming that normal production returns by the time second flush teas become available. Any decline in production in second flush teas would result in a substantially higher cost per kg,” ICRA said.

Companies are optimist that the lockdown situation will improve from May. By the time the second flush season begins in the third week of May, skiffing and pruning activities will be over and manpower deployment conditions will improve as well. “I think by the time the second flush production begins, things will normalise to a large extent,” added Asthana.

Tea buyers, however, cautioned that given uncertainty in the economy, owing to the pandemic, there is still some doubt about price movements.
 

“We have noticed that consumers are already stocking up essential as well as non-essential items and there exists much doubt in consumers’ mind about the future as companies may resort to retrenchment or salary cuts. As a result, discretionary spends like tea may get affected,” a buyer said.
 

ICRA has also cautioned that while ideally prices should improve sizably under a normal demand-and-supply scenario, the current scenario is that of uncertainty.

“The trend in export as well as domestic demand would be the main factors determining the trend in tea prices. Most of the premium export markets of Indian teas are suffering under the Covid-19 outbreak. Apart from any decline in demand, logistical issues could also have an impact on the volume of exports to those countries,” ICRA noted.