The tea market
The tea market
I. INTRODUCTION/ HISTORY
The tea market is dominated by five countries, Kenya, Sri Lanka, China, India and Indonesia, which export about 80% of the world tea. Apart from China, the rest mainly produce black tea. In 2004, the world’s net import of tea was 1.42 million tonnes, out of which 1.17 million tonnes (82%) was black tea (Anonymous, 2000-2003). In contrary, the growth rate in world black tea consumption was reduced to 2.2% during 1993-2003 (FAO, 2005).
The imbalance situation between the level of demand and supply of tea is a big threat for the tea producing countries, due to decline in prices. Similarly, the depressed price situation has been intensified in Kenyan tea industry due to high production cost (Gesimba et al., 2005). The impact was also enormous on price recovery of Indian tea traded through auction and was ruling below the cost of production (Anonymous, 1998). Previous studies revealed that decline in tea price had negative impact on tea industry in Sri Lanka mainly due to soil degradation and poor productivity (Iqbal et al., 2006). In Indonesia, the market price situation affected the income level of smallholders drastically, which constitutes the largest sector of tea industry (Yuliando and Nakayasu, 2006).
All government of tea exporting countries plans and policies recognize that tea is an important export commodity and that it has high potentials to contribute to national income, employment and environment protection. Teas, from the camellia genus, come in two main categories: orthodox/green (leaf) tea and black tea/CTC tea. The former is produced in the hills for export and is available only in limited quantities, while the CTC tea produced in the urban areas is mostly for domestic consumption.
Having examined the consumption and production links that set the demand and supply trend of tea, United Nations Food and Agriculture Organization (UNIFAO) declared a shortfall of tea in 2008. Demand for tea of 3.85 million tonnes but with only 3.78 million tonnes of production suggests a shortfall. Noticing the scenario from 2007 surplus going to successive year’s shortfall, it seems that this shortage could go up until future years.
The analyses show that tea farming and manufacturing is competitive and there are important direct and indirect benefits from tea growing. Yet, the area devoted to tea production is still very small due to some structural constraints and policy anomalies that need to be addressed for the growth of the sector. The supply-side constraints (not having enough surpluses or inability to expand production) for various reasons, natural, man-made and lack of competitiveness in the international market (cost and quality) or due to structural and policy reasons and barriers to trade and in this case, drought – that hit hard the major producing countries of tea which are Kenya, Sri Lanka and India in 2007.
Moreover, such case has soared the price of tea, citing the difference between 2007 and 2008 census of average price of tea. Kenya’s tea board reflects almost a third higher per kilogram basis of tea showing US $2.33/kg compared to 2007’s US $1.76/kg. This has caused the more expensive black tea to jump to a record of US $2.70 last august, 2008.
It is, therefore necessary to take appropriate measures to improve the current price level. A supply management is considered as a key to influence the market price. Principally, it is an adjustment to fit the level of supply and demand at certain price goal. The objective of this study was to analyze a supply management option for tea producing countries in order to improve the price level.
II. STATEMENTS OF THE PROBLEM
i. How would the tea makers respond when the demand for tea exceeded its supply?
ii. How could the producers of tea maximize its exports?
iii. What can we substitute and how does it affect when there is an increased price of tea?
III. ALTERNATIVE COURSES OF ACTION
i.Tea industry are deeply divided over plans to boost earnings by importing cheaper leaves for blending and re-export, over fears the changes could water down the pure brand. Sri Lanka for example, who has been a leading exporter of the commodity, but now a section of the tea industry wants to import leaves from countries such as Kenya, Vietnam and Indonesia and blend them with higher quality local produce.
It has been argued that Sri Lanka could almost double its exports of 300 million kilograms (660 million pounds) annually by taking a ‘realistic’ view of the world market and blending its tea with cheaper imports. Sri Lanka does not currently allow unrestricted tea imports for blending. They argue that the high quality and the correspondingly high prices have placed ‘pure Ceylon tea’ beyond the reach of the lucrative mass market, even if the industry enjoys an enviable brand reputation. Sri Lanka’s stance prompted Unilever to drop plans in the late 1990s for a factory in Sri Lanka and it instead set up its Lipton tea bagging plant in Dubai where they blend teas from East Africa and Asia — including Sri Lanka. The factory currently produces 1.1 million bags of tea an hour and is set to be the world’s biggest plant by 2015.
Sri Lanka’s export lobby argues that the country’s refusal to import leaves is only helping to further establish Dubai as a tea hub. As things stand, millions of kilograms of Sri Lanka tea are blended abroad and many argue that the island could have better control over the product if the blending were done at home.
ii.Through liberalization, the exports of value-added teas can be maximized, given the provision of cheaper traditional teas used for blending, which enable exporters to reduce the FOB price of their teas. The use of foreign teas for blending will empower producers to control for variations in agro-climatic conditions which affect the quality consistency of locally grown teas. This consistency in produce will increase the brand ability of the value-added exports, thus increasing competitiveness amongst brand-conscious consumers who seem to make up the majority of the global market.
Also, liberalization of imports would lead to increasing the export of value-added teas which will result in a number of additional benefits to the society. These include greater employment, increased foreign exchange and the potential of strengthening industrial clusters in the economy via forward and backward integration.
From the corporate sector’s point of view, plantations may be able to invest more into their CSR programs, increasing the overall welfare of poor plantation workers, while reducing the need for government intervention in wages. Higher profit margins will also allow the corporate sector to invest
in enhancing their production and efficiency.
iii.When the growing demand and short supply of teas continues, price will be unsettled. However, due to a good harvest year, prices of alternative goods were able to decrease. Tea lovers would probably shift to those products. One of the substitute commodities that can be switched from tea is coffee which is found to be of the same rate to tea.
Tea and Coffee plants are members of the evergreen family. If allowed to grow naturally, both would develop into fairly large trees. But both plants are kept trimmed to the height of a shrub, so they can be manageably harvested. Both plants produce a drink whose flavor is subtly affected by the growing conditions, such as soil condition, moisture, surrounding vegetation, etc. Both Coffee and Tea have been naturally imparted with a chemical that provides stimulation and caffeine. Also, both drinks come from dried versions of a part of the plant. Finally, both use very similar methods of preparation.
In effect of this, people will switch from teas to coffee (due to a cheaper price), and thus, increasing the quantity supplied and demanded of coffee while decreasing the quantity supplied and demanded of tea.
IV. ANALYSIS/ CONCLUSION
We, therefore conclude that the increased price of tea is due to the higher demand than the supply. According to the Economic Help web site, tea is considered an inelastic consumable good – wherein the demand is not solely dictated by economic downturns and even as prices for tea climb, consumers continue to purchase it because they perceived the tea as a necessity. Additionally, because tea is not viewed as a luxury item, many consumers will actually buy more tea in lieu of luxury drinks such as soda and coffee. With the demand for tea already on the rise, this pattern is forcing demand to climb even higher. And because tea does not follow the normal pattern of other luxuries, the producers and manufacturers do not follow the same trends that other luxury producers follow – such as lowering prices or offering savings in an attempt to continue attracting consumers to their product. In fact, recent reports suggest that the prices for tea will continue to rise over the next three to four years.
Supply for tea is also falling as the areas that produce tea fall under weather extremes and droughts – destroying the tea crops. Tea production is not easily increased to meet demands in a short amount of time. This means that the droughts that continue to hit India, Sri Lanka and Kenya can and have done much more damage to tea production in the long run because there is really no way to work around these hurdles and keep production levels the same.
And while weather patterns are beginning to return to normal for those major tea producers, prices are not expected to drop. This is due to how long it will take for tea production to return to normal levels. Even with weather patterns are favorable and producers have good crops, tea producers claim that they will still not be able to meet the growing demand for tea. In such case, consumer’s buying preferences may change. They may look for much cheaper alternative goods that can be switched from tea, which is coffee.
Tea price is indeed a commodity of great demand over the years of exposure in the market. The sensitivity of the consumers to their personal health and well-being creates an enormous hike in the call for the availability of such in the established trading places. In lieu to this, the problem on the market price of tea taken by its unresponsive supply to the growing demand of the market aroused.
Major tea producing countries are having a hard time to uphold the supply of the tea because of varying reasons like droughts and other environmental causes. In resolving the problem, the need to think of more viable ways to market the limitedly supplied tea in the market becomes a priority. The requirement to develop alternative means of cropping tea leaves should certainly be considered as well for the long run aspect of the industry’s sustainability.
The supply is definitely of no assurance for tea producers because of several factors. In this case, the marketing efforts of the distributors should be aimed at making the consumers buy despite the high pricing for tea. It may be positioned as a herbal detoxifier or any other health supplementary product whereas paying of quite much is never an issue.
On the other hand, the culturing of tea shrubs that could withstand the environmental trials should be of precedence to facilitate and address the shortage in the market. Through the influx of biotechnology, the ends focused on the improved planting of tea shrubs is not too far from realization.
Coffee as an alternative is viably a resort for unsatisfied consumers. In this note, the substitution effect could manifest and make a declined consumption of tea. It is an opportunity for the tea growers to see the option of capitalizing to coffee, if a better planting chance is possible, to recover their market share lost.
Tea pricing policies should be likewise monitored not to allow further instability in the marketplace to prosper due to irrational fluctuations in the price. The price must be attained at the lowest possible level, as the considerations would allow and not inflicting losses to the businesses and growers, to maintain the loyalty of the consuming public.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 17 October 2016
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