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An uptrend in production could see prices dip, but that may be a good thing as plantation companies will have more tea to sell. Photo: Mint
An uptrend in production could see prices dip, but that may be a good thing as plantation companies will have more tea to sell. Photo: Mint

Tea prices rise, but output holds key

A better balance between rising prices and falling output is needed for plantation firms to do well

Domestic black-leaf tea prices have shot through the roof in 2012 because of falling domestic tea output. A decline in global tea output has seen international prices increase as well. But June saw local production improve, and depending on how that trend develops over the rest of the year, prices will move accordingly.

An uptrend in production could see prices dip, but that may be a good thing as plantation companies will have more tea to sell, even if at slightly lower prices. In the June quarter, for example, McLeod Russel India Ltd’s operating profit fell by 60% year-on-year (y-o-y) despite a 20% increase in per kg realizations, due to leaf purchased to make up for the crop shortfall, and also due to an increase in wages and other production costs. Tea sales by volume had declined by 18.6%. Therefore, a better balance between rising prices and falling output is needed for tea plantation companies to perform well.

In June, India’s estimated tea production rose by 6.6% y-o-y, with plantations in northern and southern India reporting an increase, according to data from state-run Tea Board of India, though January-June has seen output decline by 5.6%. Production in the next few months will determine how good or bad the final harvest will be. Prices have risen sharply, and a better output poses a risk to a continued increase. Weekly average prices of tea sold in north India’s auctions have risen by 42% between 7 April and 9 June. But after that, they have declined by 10% till 11 August.

International tea production, too, has been volatile. Kenya’s tea output between January-June is down by 11.2%; it rose sharply in May but slumped sequentially in June. Sri Lanka, another major tea producer, has seen output in January-June drop by 4.3%. African tea prices have been trading firm, but Sri Lankan tea has not seen a similar increase.

If India’s tea output continues to improve, that should be a positive factor for local tea companies. That, in turn, is dependent on the weather, which has proved to be a volatile variable. This makes for an uncertain outlook for Indian tea companies, and investors would do well to keep an eye on production numbers both in the domestic and international markets. A sustained improvement in tea production and higher y-o-y prices (even if they come off their 2012 highs) should result in a good performance.

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