Massive crop failure in Kenya and Sri Lanka due to dry weather has led to significant shortfall of tea in international markets.
Tea production in Kenya and Sri Lanka in January-July 2009 has fallen by 11.5% year-on-year (y-o-y) and 24% y-o-y respectively. This along with increase in international demand has led the demand outstrip supply, leading to surge in international tea prices.
This was largely reflected in tea prices at various international auctions, where tea prices were 18-20% higher y-o-y in July 2009.
The significant drop in tea production in some of the key tea-exporting nations has resulted in increased demand for Indian tea in international markets.
However, with unfavourable weather conditions, Indian tea production during the period January-June 2009 was down by 3.4% y-o-y to 333.9 million kg (as against 345.7 million kg in January-June 2008).
Increase in demand for Indian tea, production shortfall in domestic markets and spiraling tea prices in international markets have resulted in huge surge in the price of (raw) tea at Indian auctions.
Auction tea prices stood at Rs108.8/kg in July 2009 as against Rs88/kg in July 2008.
This has resulted in the firming of the export realization price, which stood at Rs131.98/kg during the period January-June 2009 (as against Rs102.76/kg in January-
June 2008). Consequently, domestic tea companies saw a similar increase in their realisations.
The spike in tea prices has been a boon for tea plantation companies in India. We believe McLeod Russel, being one of the largest tea companies in India, is a good trading idea on the back of current up-trend in tea prices.