Home >market >mark-to-market >Jump in tea output seen may dampen prices

In 2012, tea prices were firm as output was affected by bad weather. But, having less tea to sell even as fixed costs were rising posed a problem for Indian plantations.

Current trends suggest 2013 may see output rebound. Early data suggests Kenya may see a significant increase in production. The first two months (January and February) have seen output increase by 53.5%, but some of that growth is due to a low base effect. If we consider 2011 as the base year, then the growth is much lower at 33.8%, but is healthy nevertheless.

India’s tea output is up by 5.5% in these two months, but these are early months because the bulk of India’s production occurs between May and October. Sri Lanka, another leading tea producer, too, saw production increase by 8.4%. The broad trend seems towards a better output in 2013 in most tea producing countries. Of course, a sudden shift in weather patterns can throw these trends off the track.

An increase in output has the inevitable effect of pushing prices down. It is already visible in Kenyan tea auctions. The March average auction price saw an 8.8% decline over the preceding month. Indian tea prices are holding firm, show data on average monthly prices from the Tea Board of India, but the trend will become clear as the season progresses. Typically, when global output increases, there is a calming effect seen on prices, unless local conditions are drastically different.

If global tea output rises, we can expect prices to soften. If India’s output echoes the trend being seen globally, domestic prices, too, are likely to fall. But, the benefits of a higher output should also accrue to Indian companies. Tea marketers will see procurement costs reduce. But local brands and loose tea sellers typically gain market share during a period of falling prices, as they adjust prices downwards faster compared with large tea brands. That may make the market more competitive, especially for products targeted at the masses.

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