Recovering tea output stabilizes prices

Passing on price hikes is a challenge in the current environment as tea prices are high y-o-y
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First Published: Tue, Nov 20 2012. 08 57 PM IST
An improved output scenario is good for the domestic tea growers as an increase in prices with falling output is not proving beneficial. Photo: S. Patgiri/Mint
An improved output scenario is good for the domestic tea growers as an increase in prices with falling output is not proving beneficial. Photo: S. Patgiri/Mint
Domestic tea prices have been see-sawing in the current fiscal, rising sharply in response to the falling output, and then stabilizing as the output improved. Between April and September, tea output was 690.3 million kg, or an annual increase of 0.2%. It may not seem impressive, but is much better than the 3% decline seen in April-June.
It may also explain why northern India plantation tea prices have declined since the last week of August, when they were up by about 30% year-on-year (y-o-y), and are up 15% as of end-October. That is still a healthy increase, especially considering that the crop prospects have improved.
The trend appeared to be repeated globally as well, as Kenya’s output between January and September is down by 4.4%, but is still better than the situation in end-May, when it was down 22.3%, based on data from the Tea Board of Kenya and Africa Tea Brokers Ltd. Sri Lanka’s tea output had declined 1.4% between January and September, but improved from the 4% decline seen till June.
An improved output scenario is good for the domestic tea growers as an increase in prices with falling output is not proving beneficial. For example, McLeod Russel India Ltd’s September quarter results show that its average selling price of tea rose 11.4% y-o-y, but its operating profit rose by only 4%.
The main culprits are: the higher cost of paying for bought leaf tea to make up for a crop shortfall, the impact of a new wage agreement, and the rising power and fuel costs. An improvement in tea output, with stable auction prices, may therefore be more beneficial to plantations, especially as fixed costs are spread over a larger sales volume. The situation for packet tea companies, such as Hindustan Unilever Ltd and Tata Global Beverages Ltd, is a bit better as prices have moderated. But tea prices continue to remain expensive y-o-y, and passing on price hikes to customers is a challenge in an inflationary environment. That makes life tougher for them.
The dichotomy in the fortunes of growers and blenders was visible recently, when one broker issued a research report on McLeod Russel with a buy recommendation, while another broker made out a case for an under-weight recommendation (industry-speak for sell) on Tata Global.
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First Published: Tue, Nov 20 2012. 08 57 PM IST
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