If you are fond of your cup of chai, this is a good time to be living in South India. Wholesale prices of Indian tea have been diverging sharply between North and South India this year. Prices at the auctions in South India have fallen sharply, even as those up north have held firm.

In the mid-October auction, for example, North Indian teas (this includes all producing regions except the five Southern States) fetched an average price of ₹138.2 a kg, almost the same as last year’s price of ₹142. But South Indian teas were auctioned at ₹82.2 a kg, a good 18 per cent below last year’s levels.

For the period up to September 2014, prices in North India averaged about ₹145 a kg while those for the South averaged ₹85 a kg, according to Tea Board data. While North Indian teas usually command a premium to South Indian grades, the gap has widened significantly this year.

With prices in the South at a multi-year low, planters in these States have been complaining of significant losses that could make operations unviable at many of their plantations.

The North-South divide in the direction of tea prices this year reflects plantation output in these regions. Thanks to a reasonably good monsoon, planters in Tamil Nadu, Kerala, Andhra Pradesh and Karnataka produced 158.5 million kg of tea between January and August this year. That was 7.4 per cent higher than the same months last year.

But a dry spell and an erratic monsoon in the key producing States of Assam and West Bengal trimmed North Indian tea output to 543.6 million kg for the same period. This is 3.2 per cent lower than last year’s levels.

Lean season As we head into the winter months, Indian tea prices are likely to climb higher. For one, as North India accounts for over three-fourths of the nation’s tea output, the drop in production in these States has a greater impact on all-India price trends. Two, the five months from November to April usually represent the lean period for tea production every year. Plantation output typically drops from an average of about 140 million kg in the highly productive summer and monsoon months, to about 45 million kg in these winter months.

As consumption typically spikes during this time, tea prices tend to witness a seasonal surge. This year, the situation may be exacerbated by the weather-related problems in the North Indian plantations. Overall, planters predict that domestic tea prices may drift 10-11 per cent upwards over the next few months. Apart from seasonal drivers, tea prices also depend on the quality and timing of the output. For instance, Darjeeling ‘first flush’ teas, which are usually produced in March-April, just after the lean season, are much sought after for export to Europe and the UK, where floral and milder flavours of tea are preferred.

Global slump The other key driver of Indian tea prices is export demand. India produces about 1,200 million kg of tea annually. Of this, about 215 million kg (18 per cent) is exported. Indian teas are exported primarily to Russia, West Asia, Europe and Pakistan.

Given that Indian exporters face stiff competition on the quality and pricing fronts from Sri Lankan, Vietnamese and Kenyan teas, export realisations depend mainly on global price trends.

Global glut Thanks to a supply glut, global tea prices (at Kenyan auctions) have corrected sharply over the past two years, plunging from a peak of 368 cents a kg in November 2012, to 233 cents by September 2014, a 36 per cent fall.

Prices are now at levels prevailing way back in 2008. While tea prices are unlikely to climb back to their highs anytime soon, it is generally believed that the beverage bottomed out in the early months of 2014.

From hereon, the improving economic outlook is expected to provide a fillip to global beverage consumption. World prices of coffee, which has better fundamentals, have shot up sharply in recent months. In its latest commodity price forecast, the World Bank has predicted that global tea prices may inch up to an average 275 cents a kg in 2015 and 279 cents a kg in 2016.

But the forecast increases are marginal. Therefore, while tea may not bring much cheer to plantation owners for some time yet, Indian chai drinkers can continue to look forward to a reasonably priced cuppa.

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