In a rare occurrence, extreme dry weather this year is wrecking havoc with tea harvesting in three major producing countries — India, Kenya and Sri Lanka. The three among them had a share of 1.644 billion kg in the total world production of 3.750 billion kg in 2008.
Furthermore, their combined exports of 878 million kg accounted for more than half of the world tea exports last year. It is, therefore, well understood what the combined shortfall in production in the three countries will have on tea prices as we go forward.
The Indian tea production took a knock of 15 per cent to 144.5 million kg up to April and the first four months of the year saw exports decline by nearly 20 per cent to 50.3 million kg. Central Bank of Sri Lanka says the island nation’s fall in tea export earnings to $58.2 million in April from $104.7 million in the same month of 2008 was mainly due to drought-caused low production.
Sri Lanka, which specialises in the manufacture of orthodox tea and rules the world market in this segment, is the only tea producer to feel the impact of global economic meltdown. To this, now, is added the setback in tea production.
The recently published J Thomas annual report says Sri Lankan exports came under cloud beginning the final quarter of 2008 as the West Asian orthodox tea buyers found revenues from oil drying up fast. Moreover, as the currencies of Sri Lankan tea importing countries weakened vis-a-vis dollar, West Asian traders found it increasingly difficult to get bank credit forcing many of them to stay away from bidding at Colombo auction.
Kenya, which last year lost 23.7 million kg tea at 345.9 million kg, as it was hit by drought and political upheavals in the first quarter, is once again being visited by dry weather this season. While in the 2009 first quarter, the Kenyan tea production was down 7 per cent, rains have not gathered force since. In any case, the June-July cold weather in Kenya is not conducive for tea leaves to mature for harvesting.
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Tea Board chairman Basudeb Bannerjee told Bloomberg that as the unremitting dry weather was taking toll of India’s tea production, there was already a loss of an “estimated 30 million kg of high quality tea because of the drought in Assam and the north-east.” Bloomberg also quotes McLeod Russel managing director Aditya Khaitan saying that the dryness being so intense that there is no hope of making good the lost production in the year’s second half.
The June rains deficit being 45 per cent and there also remaining the threat of El Nino developing in late July and August, Khaitan’s fears about a diminished crop are to come true. India had a crop of 980.8 million kg last year and production shortfall this year, according to industry officials, will be a minimum 5 per cent.
One will not contest Khaitan’s inference that a 30 per cent rise in prices over last year is a distinct possibility if the world is going to be short by about 100 million kg tea. Banerjee cannot but be on identical wavelength as Khaitan since the demand for the beverage defying price spikes remains “quite high” and inventories with producers and major blenders remains low. In a situation like this, even a five per cent production shortfall will be major price booster.
According to Tea Board, the auction price for north Indian tea for the week ended June 23 was Rs 137.47 a kg against Rs 92.02 in the corresponding week of 2008. The price advance in the case of south Indian tea is nearly Rs 31 a kg to Rs 88.94 a kg. Indian tea auction average made a smart advance of Rs 19.81 a kg to Rs 87.78 a kg.
There have been further price advances since. This, as the J Thomas report suggests, should be seen in the context of “tea prices lagging well behind the rise in the price index for all other commodities.” Moreover, since tea constitutes an insignificant portion of family expenses on food items, the further beverage price inflation will most likely have no impact on demand.
What will be watched with interest now is what steps the tea companies, with their earnings swelled, will be taking for the improvement of their estates so that the overall quality of the Indian beverage continues to improve. Good liquoring teas are fetching attractive premiums over other teas and the trend will continue. It will do the industry here good if attention is also given to produce larger volumes of clean well made orthodox tea.