India’s tea output was affected in 2010 due to unfavourable weather and pest attacks in North India’s tea gardens. Normally, lower output should translate to higher tea prices, but it’s been a mixed bag for tea growers. Though tea prices did rise during the year, it was not enough to compensate for the drop in volumes. To meet domestic demand, large plantations had to buy tea from smaller plantations, which hit their margins due to higher input costs.

Between January and October, India’s tea production in North India fell by 3.5% to about 612 million kg, while it rose by about 3% to 202 million kg in the South. In October alone, tea production in North India fell by about 12%. Tea growers’ predictions of higher prices came true, with August auction prices for North Indian varieties up by 10%. But prices were not uniformly high during the year, and average auction prices between January and October were up only by 3.5%. Prices for South Indian varieties were down by 18%, even as output rose by 9%.

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This affected the performance of tea growers. For instance, McLeod Russel India Ltd’s sales in volume terms fell by about 0.7%, despite a 5% drop in its crop as it supplemented its own production with purchases from other growers. Its sales realizations, however, rose by just 5%.

If domestic prices did not rise much, growers could have exported if realizations were better. But other tea growing countries had a good crop year. Sri Lanka’s tea output between January and November is up by 14% while Kenya’s tea output between January and October is up by 34%.

These have kept export prices under check, with North Indian varieties fetching only 2% more compared with last year, during the January-October period.

Indian tea growers have thus had a weak year, in North India due to lower output and lower-than-expected growth in prices. In South India, while output was stagnant, prices fell. Thus, margins got affected due to a combination of lower output, lower increase in prices, higher material costs and limited ability to lower costs. The benefits of India’s lower output, therefore, have gone to growers in countries such as Kenya and Sri Lanka, where output was sharply higher accompanied by steady prices.

Indian tea companies will now look to next year for better times. They will hope that North India’s tea output recovers, and global output grows at a slower rate or better still falls, contributing to higher prices. That may seem a tall order, but it is what is needed to ensure they have a much better year in fiscal 2012.

Graphics by Yogesh Kumar/Mint

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