Rising consumption to keep tea prices firm, say producers

Global tea prices are likely to ease next year on higher output, with weather patterns returning to normalcy in the main producing regions of Asia and Africa, said the Food and Agriculture Organisation (FAO) of the United Nations in its latest report. Global tea prices hit the roof in 2009 due to a production shortage.

However, Indian producers are not buying the FAO forecast. They say India 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. Add to it a year-on-year consumption growth of about 30 million kg in India (consumption is presently about 800 million kg, and production about 960 kg), and it appears prices will remain strong.

“The shortage in the system will not be made up, even if the crop is very good,” said Aditya Khaitan, managing director of McLeod Russel India, the world’s largest bulk tea producer, with a production of 96 million kg. Prices, he said, would remain strong.

Karan Paul, chairman of the Apeejay Surrendra group, said he was confident of the India story and about Indian prices driving global prices. The group has one of the bigger plantation portfolios, with a production of 25 million kg.

The FAO Tea Composite price, the indicative world price for black tea, reached a high of $3.18 a kg in September, amid droughts in India, Sri Lanka and Kenya, underpinned by increased demand, compared to an average price of $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.

Industry sources said, the global shortage is 165 million kg now. “The new year will be very good. 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 our consumption figures. In tea, we are still exporters, but that situation will change. In seven to 10 years; we 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,” said Paul.

The basic premise of the confidence level among Indian producers is a growing consumption at three per cent on a year-on-year basis, which negates the FAO perception that tea prices would ease next year on higher estimated output. Khaitan added that 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 165 million kg.

According to official figures during January-September, world tea production stood at 1275.5 million kg, down by about 89 million kg.

FAO has said there may be more plantation in the major producing countries in Asia and Africa. “Some producing countries, such as India, have acted responsibly and announced they would not be expanding current tea areas beyond what is required for replanting and rehabilitating existing tea gardens,” said Kaison Chang, Secretary of FAO’s Inter-Governmental Group on Tea, the only international tea authority.

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

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. Some of the price increases were passed along the value chain to consumers, as retail prices increased by five percent across supermarkets in Europe.