Reading the tea leaves

Both wholesale and retail prices of tea are likely to head higher over the medium term



Wholesale tea prices in India, which were in a slump last year, have perked up in the first four months of 2016. Average auction prices compiled by the Tea Board showed all-India prices averaging ₹116/kg between January and April 2016, 13 per cent higher than the ₹103/kg recorded during the same period last year.

Bubbly South

It is South India which has experienced the sharper spurt, with auction prices in the first four months a good 25 per cent higher than 2015 levels. As against ₹81-86 a kg last year, auctions at Kochi, Coonoor and Coimbatore have fetched ₹100-110 a kg this year.

The revival in South Indian tea prices, after last year’s severe declines, can be attributed to both seasonal and structural factors.

For one, an extended dry spell in South Indian tea growing regions during the peak production months of April/May has cast doubts on the current year’s output. With tea production in the first three months of 2016 down by about 7 per cent, the trade is forecasting that South India could end the year with a 10 per cent production shortfall compared to last year. Two, the last couple of years have seen recurring labour unrest across plantations in this region, with workers in this labour-intensive industry demanding higher daily wages. As the resulting wage settlements set a higher floor on production costs, both wholesale and retail prices of tea are likely to head higher over the medium term. Three, strong export offtake in the last one year has also lifted tea prices in the South. Though South India produces just a fifth of the country’s total tea output, nearly half of its teas are shipped out into the export markets.

Sedate North

Tea prices in North India have displayed more muted increases this year, with average auction prices of about ₹121/kg in the first four months, just 9 per cent higher than last year. But as January to April represent the lean months for tea output in the North, these trends cannot be taken to be really representative of the year ahead. While South India records higher output in the first half of the calendar year, with peak production months in May and June, the peak season for North India is back-ended with 70 per cent of its annual output recorded in the five months from June to October.

While the tea trade began 2016 with expectations that it would be a bumper year in North India (with good rains, output in March was well above last year’s levels), unseasonal rains and floods in Assam in April and a dry spell in the growing areas of West Bengal during the same month have toned down expectations in the last couple of months. It is, however, early days yet and weather conditions over May/June could be the deciding factor on annual output.

By a current reading of fundamentals, therefore, Indian tea output may be marginally lower than last year’s 1213 million kg. If demand growth sustains at past rates of 2-3 per cent, firmer prices could hold up.

Exports, the wild card

A key wild card factor to this outlook will lie in the global prices and export performance of Indian tea. In this context, 2015-16 saw reasonably good export performance, with India recording an 11 per cent increase in export shipments in volume terms, to 220.8 million kg. While markets such as the US, Europe and the UK saw lower offtake of Indian teas, this was more than made up by demand from our Asian neighbours — Bangladesh and Pakistan as well as West Asian countries like Iran.

But one key challenge in the year ahead arises from the lifting of economic sanctions on Iran, now the second largest importer from India. During the era of sanctions, Indian tea exports to Iran enjoyed special status under a Rupee-Rial exchange agreement, but there are concerns that Iran will be free to look for other trading partners as sanctions are lifted. However, with the emergence of good demand from alternate markets like China, Malaysia and Indonesia, such risks could be offset. While volumes may hold up, export realisations may continue to be pressured by falling global tea prices.

Kenyan auction prices have dipped by nearly 30 per cent in the last six months on the prospect of global oversupply. For now, therefore, it is domestic markets that Indian tea producers are looking to for a cup that cheers.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





This article is closed for comments.
Please Email the Editor