Shares of tea firms have lost some of the ground they gained in early June. Prospects of higher prices appear to have initially propelled these shares. McLeod Russel India Ltd, for example, rose by 13% between end-May and 9 June, but has declined by 3.2% since then. It’s a trend that’s reflected across other tea producers too, such as Jay Shree Tea and Industries Ltd, Dhunseri Petrochem and Tea Ltd and Goodricke Group Ltd.

The domestic industry appears to be anticipating an increase in tea prices based on lower output in April due to poor weather. Production declined in April by 26.7% in north India and by 18.4% in south India, according to the Tea Board of India. Output in May has been affected as well, according to news reports, though data is not yet available. But weather conditions have improved and June may see more conducive conditions, which may have prompted a rethink among investors. June-October period is critical as it accounts for more than two-thirds of north India’s plantation output.

Lower output in the initial months has seen auction prices in north India rising by 7.5% in the week ended 7 June. Though output declined in the south too, prices were down by 15.4%. Globally, prices are declining.

In Africa, Kenya’s tea price fell to a one-year low of $1.86 per kg at the most recent auction, according to Bloomberg. Adequate supply due to a huge jump in output is responsible, as Kenya’s output was up by 17% in 2013 though it is down by 2.2% in 2014 till April.

India’s output was up by a smart 6.5% in 2013. The coming months will determine which way prices go. A revival in output will see them fall. Producers are obviously hoping the opposite happens. Unfortunately, for prices to rise sharply, output has to decline substantially.

The unit cost of producing tea may also go up due to higher fixed costs, higher wages and more expensive third-party tea purchases. Thus, the benefits of higher prices may be eaten away by higher costs. The difficult position tea producers find themselves in may explain why their shares have given up early gains.

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