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Why Tea Prices may be Rising

Is the price of your afternoon beverage burning a hole in your pocket? Brace yourself. It’s going to get a lot worse.

Kenya, Sri Lanka, and India account for 80% of the world’s black tea production. All 3 countries attempted to increase their production of tea in 2010 in response to increased global demand, although India’s production slipped again after an attack of helopeltis seriously damaged the crop last summer.

Yet the price of tea keeps rising. Even with the increased production in the first half of this year, demand for tea still far exceeds supply.

It’s not just this year either. Current production is barely holding even with the current level of domestic consumption, and is falling behind rising global consumption. The cumulative deficit of 2004-2009 is over 440 million pounds of tea.

Domestic consumption of the big exporters is also rising. India’s domestic tea consumption has risen by 3% each year; the 2010 increase will be as high as 3.5%. At the same time, India’s production levels have remained stagnant. If the trend continues, India is likely to become a net importer of tea.

Late season dry weather has also damaged the tea crop. Despite the early rise in anticipated production, India’s final 2010 production numbers are slightly lower than over the same period last year. Combined with the higher domestic demand, this means that tea exports from India in 2010 have declined by 12%. Sri Lankan and Kenyan production were also hurt by dry weather.

Making matters worse is that investors hungry for pre-2008 returns have begun aggressively speculating in tea. Several of the best performing shares on India’s BSE500 Index belong to major tea buyers, which are buying up large quantities of high quality tea and hoarding it against winter demand. Tea prices at the world’s largest auction, held in Mombasa, Kenya, keep setting new record highs. The bulk price of top-quality Assam tea has nearly doubled. As a result, the wholesale and consumer price of quality tea has jumped.

The effect is strongest among teas produced for high volume export. The average auction price of Darjeeling and CTC (crush, tear, curl) tea has jumped by 20% in 2010. Darjeeling is one of the most popular teas in Russia, the world’s highest consumer of tea. CTC tea, which is commonly used in teabags, is very popular in the United Kingdom, the world’s second highest consumer of tea.

Tea trading channels have very small margins, so nearly all price increases are passed on to consumers. Consumers have responded by switching to cheaper brands. In turn, this raises the global demand for lower quality teas. No matter what type of tea you drink, you will feel the pinch.

The inability to make up the production shortfall may indicate that all 3 major tea-exporting countries may be close to their production limits. Changing global weather patterns may cut even further into tea production.

Current expectations are that the global tea shortage will continue through 2011, possibly longer. The cumulative global deficit may reach 290 million pounds of tea by April 2011. Tea speculation is unlikely to turn into a bubble while the shortfall continues. As long as global demand continues to outstrip export production, the price of tea will keep rising.