What the tea leaves say
Considering the likelihood of higher tea output in Kenya and good monsoon predictions for India, caution is advisable
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If dry weather at the beginning of 2015 affected Kenya’s annual tea output, then, ideal weather conditions may result in a good crop this year.
Back home, too, the Indian Meteorological Department’s (IMD’s) initial monsoon estimate is forecasting good rainfall.
A more detailed region-wise estimate will follow later but for now, one should assume good rains may result in higher tea output.
Investors should be keeping an eye on these developments as they assess the prospects for tea companies.
The higher tea output in the world’s major tea producing countries is a red flag for tea prices. In Kenya, the first two months of 2016 have seen tea output rise by 43% over the same months a year ago, according to data from Africa Tea Brokers Ltd. But that’s also due to a low base effect as dry weather had affected output in 2015. If we change the base to 2014, the current year’s output is still higher by 19.8%. If rainfall continues to favour tea output in the next few months, then we are likely to see a substantial increase in Kenya’s output in 2016.
India’s tea season in North India will pick up pace later; in 2015, the high months for tea production were between May and November. Tea trading company Van Rees said in its latest weekly report that heavy pre-monsoon showers and a favourable winter in the North have led to higher crop levels this year. In its round-up, it says it expects “plenty of tea in the near future”. India’s North India plantations accounted for four-fifths of tea output, according to the Tea Board of India’s data, with South India bringing up the rest. Abundant tea output globally could signal weak trends in auction prices. Whether prices trend weak and by how much is an important factor determining the performance of companies. Costs are another factor. Last year, tea company McLeod Russel India Ltd had said it expects costs to increase by 13% due to higher input costs and wages. In the current year, it expects costs to increase by 7%.
While a lower increase in costs is indeed beneficial, a decline in tea prices could nullify that. Shares of leading tea companies have been rising since the past few months. It is still early to say what impact India’s monsoon can have on output but some caution is advisable, considering the likelihood of higher tea output in Kenya and good monsoon predictions for India.