NAIROBI, Kenya, Sept 26 – Global tea production in 2018 was estimated at 5.85 billion kilos up from 5.81 billion kilos in 2017, 0.68 percent increase.
Africa’s contribution to this production figure was 717 million kilos accounting for 12.25 percent. Global exports were 1.85 billion kilos while Africa’s contribution was 654 million kilos accounting for 35 percent. Productivity is predominantly driven by weather and improved husbandry.
Global consumption of tea in 2018 was 5.61 billion kilos compared to 5.48 billion kilos in 2017 an increase of 2.4 percent and a surplus of 241 million kilos.
Economies of several importing countries are heavily dependent on oil and gas whose prices have been persistently low.
Currency devaluations in several importing countries have had a negative impact on disposable income for consumer goods.
The FAO Intergovernmental Group on Tea (IGG/Tea) has advised that greater effort should be made on expanding demand, particularly in producing countries where per capita consumption is low compared to traditional import markets. In addition, FAO has encouraged diversification into other tea varieties such as green, organic and other value-added teas.
With a population of over one billion people and growing, Africa is the second most populous continent in the world behind Asia and provides a big potential market for tea and its related products. This would lead to favourable tea prices and better returns to the tea producers and other members across the value chain.
Reasons for low prices and returns
The Mombasa tea auction is currently the largest black CTC tea auction centre in the world and accounts for 32 percent of global tea exports. The auction is known for high quality teas and operates on forces of demand and supply. When the volume of tea offered increases in a situation of static demand the price will decline.
In the year 2018, the Mombasa tea auction centre traded over 400 million kilogrammes of tea valued at over one billion US dollars. More than 396 million kilos of tea were sold through the auction in 2015 and 390 million kilos in 2017. In 2013 the average price declined by 2.5 percent in relation to 2012 to 2.79 USD per kg. In 2014 average price declined further to 2.65 USD per kg. The average price of tea was $2.73 per kilo in 2015, $2.29 per kilo in 2016, $2.98 per kilogramme in 2017 and $2.58 in 2018.
In July, 2019 the Mombasa Tea Auction witnessed the lowest average price of US$ 1.76. This has since gone up to US$ 2.05 and is rising. The consolation is that the low tea prices are also being witnessed in competing tea producing countries such as India and Sri Lanka.
Factors contributing to the low prices and returns are the overproduction of tea as a result of increased planting, husbandry and rehabilitation. Tea production was 350 million in 2012, 432 million kilos in 2013, 445 million kilos in 2014 and 399 million kilos in 2015. The production was 473 million kilos in 2016, 439 million kilos in 2017 and 492 million kilos in 2018.
External socio economic and political factors have contributed to the declining tea prices. Pakistan continues to be a major player in the global tea trade. The impact of currency devaluation in that country is felt today. Inflation in Egypt reached highs of 20 percent in 2018 but is projected to drop to 14 percent in 2019. The United Kingdom continues to be unpredictable in the wake of uncertainties associated with Brexit.
High inflation rates in Sudan hitting 70 percent and the recent political developments are a concern for the tea trade. The reintroduction of US led sanctions to Iran is bound to have far reaching ramifications to the trade as well. A reduction in export to Arabian markets due to the Arab spring uprising, drop in oil prices and heat wave in Europe have all contributed to the declined demand and consequently low prices.
Decline in quality of some teas as a result of weak enforcement of Tea Regulations resulting in leaf hawking, mushrooming of new tea factories and in some instances, substandard processing machinery has also contributed to the problem.
The tea trade has not embraced and kept pace with the changing consumer demands from tradition and culture to health and wellness benefits in tea. This requires a need to shift towards premium tea and high value specialty teas as consumers are more knowledgeable about tea varieties and origin. Young consumers are increasingly searching for innovations and healthy teas while consumers have growing interest in food-safety management systems. Supermarkets are also demanding higher quality teas often at discounted prices.
Other contributing factors to the decline in tea prices and returns include the levying of VAT on direct sales by local exporters, levying of VAT on buyer inter-trading, lack of adequate consumer driven research and development and promotional activities. Whereas VAT is not levied on the 95 percent of the tea exports the same is charged on 5 percent of the locally consumed tea.
While tea prices have been on the decline or stagnated the tea industry is grappling with increased costs of production such as labour, fertilizer, electricity and fuel. With the prevailing low average price of tea most tea producers are not able to sustain the costs of production. The current low returns to the multinational tea companies and the KTDA small-scale tea farmers in the form of the annual final payments popularly known as “tea bonus” is a reflection on the increased costs of production and the low international prices. Some tea producers have recorded losses.
In order to ensure sustainability of the tea industry, short term, medium term and long-term interventions are proposed. Slow down on tea production and frequent supply/demand simulation needs to be done on a regular basis and shared to act as an early warning.
Producers need to diversify from Non-CTC teas to value-added and specialty teas. This must be supported by incentives. There is also need to encourage more tea consumption in the local market standing at only 500 grams and enhanced promotion especially in new and emerging markets.