Supply the main price determinant for tea

The Indian Tea Association chairman Aditya Khaitan wonders if there is another commodity where producers do not have any control over output, costs and prices. Even assuming that the majority of owners are keeping their gardens in good shape, rain and their spacing will finally tell on production and tea quality.

In times of demand recession, producers of steel, aluminium and the rest of the commodities are found to be responding to the crisis by effecting major cost cuts. Sadly though, the “very high fixed cost Indian tea industry” could not do that in the eight years to 2008 when very low tea prices left the industry badly injured with many gardens downing shutters.

Tea will always remain a pure commodity play where supply in a season will be the principal price determinant. With over two dozen countries making over 3.75 billion kg of tea and the trade mostly done on auction platform, producers however big they may be will remain bystanders in the price discovery process. As for India, structural distortions in the industry happened with the sprouting of a large number of small tea growers and bought leaf factories on the back of “very good” tea prices for a long spell till 1998. This informal producer group, enjoying much lower production costs compared to the organised sector, was responsible for over supply of the beverage and keeping the prices too low to the detriment of the industry’s health.

While the group did wrought a kind of havoc prior to 2008 – price improvements last year and sustained at still higher levels since is because of crop setback here and also in Sri Lanka and Kenya – Khaitan strikes a note of caution that the areas under tea with the “significantly large small grower segment” are yet to attain full maturity. So even in the event of the sector’s further growth is controlled, expect it to bring more and more tea in the market in the next five years, according to Khaitan.

The point Khaitan is making is that the industry will never gain control at what prices tea is to be sold at a given point. Nothing could be better than the market is allowed to reign supreme. But is not Khaitan thinking now that the market is favouring producers, thanks to the weather playing foul with crops in India, Kenya and Sri Lanka simultaneously, the time is opportune to carry out some long postponed reforms?

The objective is to implant sinews in this 160-year old industry which is obliged to carry a historical baggage in the form of welfare costs. It’s quite a heavy baggage as such costs will translate into over Rs 7 a kg of made tea. Nobody is saying that the 1.2 million tea plantation workers, nearly half of whom are women, should be denied any of the social benefits.

But with the burden resting wholly on tea companies, the competitiveness of Indian beverage in the world market is compromised. Except for Sri Lanka, no other tea producing country has to put up with India’s kind of production cost. The well being of the industry is important not only for its high labour intensity but also to sustain India’s tea exports at around 200 million kg. Hopefully commerce minister Anand Sharma will see to it that the government comes to bear a reasonable portion of social costs.

Assam accounts for nearly half the country’s tea production. But as the militants retain the capacity to strike terror in the vast tea growing areas covering nearly 315,000 hectares, the companies are pooling money to provide security cover to the men in hot spot. Time has come for the government to consider if Assam growers should not be reimbursed the cost of organising security which works out to Rs1.50 a kg of tea.

The government’s commitment to the welfare of the plantation sector, including tea is evident in its constituting an empowered group of ministers to suggest “structural changes.” Sharma reminds the industry here that since the competition is with younger producers of the beverage in Kenya, Malawi and Vietnam, its primary focus should be on bringing about significant improvements in the quality and health of garden assets.

Refer to J. Thomas Tea Statistics and you will know what a large percentage of our tea acreage is having bushes in the age group of 40 years and more. Naturally with bushes of that vintage, productivity will take a hit and production cost will be up. The need of the hour is give a big push to rejuvenation and replantation. Bad working in the past may not have allowed the industry to do much on productivity front. Now there can’t be any excuse for not making full use of Special Purpose Tea Fund.

Business Standard