In the wake of rising cost of production and muted auction prices, the Tea Board is working on a plan to set minimum benchmark prices for various tea grades to support producers. It will help tea producing companies to shield themselves from any losses while selling their produce at auction centres. When announced, tea will be the second commodity after sugar where a minimum price has been fixed.
At present, tea prices are decided in electronic auctions. Invariably, in the initial part of the season, they are lower than the cost of production, which puts pressure on margins. In 2018, even listed tea companies' share price index, developed by Business Standard Research Bureau, significantly underperformed against the broader market. The BS tea index fell 28.7 per cent at the beginning of the year, against the BSE Sensex rising 4.7% over the level at the start of the year.
Labour costs in Assam have shot up by 18 per cent, while in West Bengal, the cash component of wages is up by 53 per cent. A report from Crisil Research suggested that prices at tea auctions across the country are set to close the current calendar year at Rs 145-146 per kg on average -- a three-four per cent rise on a year-on-year basis.
Labour costs account for 60 per cent of the total production costs.
"Deserving wages for workers are fine but the fact is that selling prices aren't keeping pace with the rate of wage increase," Atul Asthana, managing director at the Goodricke Group, said.
Tea producers have been complaining about this dichotomy, which has gradually been eroding their margins, in the trade for long. Producing companies' profits are falling. The world's largest tea producer, McLeod Russel, posted an 83 per cent increase in its net standalone profit for the first half (H1) of the current financial year to Rs 2.60 billion, while its operating profit fell by 14 per cent during the same timeframe to Rs 1.98 billion. (See chart)
Crisil Research has projected a contraction of 140-170 basis points (bps) in margins in the 2019 financial year and a further 100 bps in the 2020 financial year. The margins of integrated tea players are expected to contract 200-240 bps in the current fiscal year and a further 90 bps in the coming financial year.
"If cost pressures continue to mount higher and prices in the auctions don't cover at least for the expenses, the industry will become unviable," Azam Monem, director at McLeod Russel, said.
The reason for muted prices at the auctions is that small tea growers offer tea at lower prices as their cost of compliances is much lower than those of the large estates and tea firms.
"Often, these prices don't even cover the minimum production cost of estates. As a result, there is an overarching impact on all tea varieties and grades," a senior official with a large plantation company said.
"We need to work out some strategy whereby prices in private sales cannot be lower than the selling prices across the auction centres. A minimum benchmark price is needed for the industry to maintain profits," A K Ray, chairman at the Tea Board, said.
The Tea Board has also started coming down hard on tea waste -- a price dampener -- which at times is mixed with tea and passed onto the consumer. Mixing tea waste with drinkable tea not only results in significant quality loss of the blend but is also medically harmful to the consumer.
After an increased pro-activeness by the board in identifying such wastes, prices of lower grade teas in the Guwahati Auction Centre have already increased by Rs 10-15 a kilo to hover around Rs 120 per kg -- an unusual price at this time of the year.
However, the most impact has been felt in the auction centres in South India. The overall prices in Connor have increased by 36 per cent at Rs 101.89, in Coimbatore, it is up by 22 per cent to Rs 112.07, while in Cochin, the average prices hovered at Rs 124.40 -- up by over 12 per cent.
Besides, it has also directed timelines for compulsory annual garden closure to control the inflow of sub-grade tea -- another price dampener.