Home >Market >Mark-to-market >No reason for wild optimism in tea industry

Current tea prices are not showing the optimism reflected in shares of tea companies on Tuesday. McLeod Russel India Ltd’s share rose by as much as 4.5%, but it slipped later and closed with a mere 0.3% gain. Shares of other tea companies, which are smaller in terms of market value, saw much higher gains. These gains are on the back of chatter that tea prices could increase sharply in early FY17.

Cut, domestic prices are relatively calm in northern India tea auctions. The region accounts for four-fifths of output. Data from the Tea Board of India shows average prices in the northern India tea auctions are up by about 4% in the latest weekly auction, over last year’s level. But they have fallen since July. The south is seeing a better trend, with a 16% hike in the recent auction, but here again, prices are lower than in July.

How does this square with production? Data is available only till September for India. During April-September, tea output was down by 1.5% from a year ago in the north. October and November are important, but December onwards, production will taper as the season winds down. Tea trader Van Rees said in its weekly market report that north India’s output in November was “excellent". That could pose a risk to prices.

Global tea output is down in other major growing countries. For instance, Kenya’s tea output till October was down by 13.6% while Sri Lanka’s was down by 1.4%, according to data from Africa Tea Brokers Ltd. Kenyan tea prices have firmed up in 2015. While domestic producers hoped for a similar increase here, prices have not risen in the same fashion.

But recent news reports show managements of companies talking about prices increasing by March-April, by 15-20 a kg, according to an Economic Times news report. That’s a price increase of over 10%.

Current price and output trends do not show enough reasons to support a surge. Instead, flat to slightly lower trends in output in the northern India gardens are a worry. After its September quarter results, McLeod Russel said per kg costs could increase by 13% in FY16 because of higher wages and input costs. If prices do not increase, output is flat and costs increase, that can affect both sales and profit growth. This could change if prices move up. While there is some time to go before becoming pessimistic, there is no reason for wild optimism either.

Mark to Market writers do not have positions in the companies they have discussed here.

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