Tea Report Essay

Submitted By Mojomo
Words: 8688
Pages: 35

The price of tea has been in long-term decline while production costs have risen, putting downward pressure on farmers' incomes and labourers' working conditions. Since 1980, the real price of tea has fallen by 15%1. In the last two decades, the annual average price has fluctuated between a high of 333 cents/kg to a low of 142 cents/kg in 1980 terms, which means that the price deviated from the exponential trend by 13% in any given year. The decline in prices has been primarily due to the strong growth in supply in the face of sluggish demand. Unlike with cocoa and coffee, the ratio of stocks to demand play only a minor role in determining the price level because the quantity of tea stocks held is relatively low (because tea perishes so quickly). A large number of countries produce tea and many of them are big enough to prevent the establishment of a clear monopolistic leader, which allows for fierce competition. Demand is rising slowly and so the only way to increase significantly the amount of tea exported is at the expense of competitors. It is fairly easy for buyers to switch from one source to another, especially for blends for popular tea bags as any change in taste with the change in the source of one tea can be disguised by blending with other teas. Because of the dominance of the auction system in acting as a day-to-day intermediary between producers and buyers, producer countries have been unable to tie customers into long-term relationships. As tea deteriorates fairly quickly it is frequently necessary to cut prices in order to clear stocks. Tea supply is greater than demand from manufacturers. Producing countries stay in the market despite its scant rewards because they have invested a great deal in tea production and lack alternatives. Low prices for tea are passed on to the poorest segments of a country in the form of low wages on plantations. Given that it is easier to cut costs (by reducing labour costs) than raise prices (impossible for an producer country to attempt unilaterally), producing countries have to remain competitive by lowering wages -- which partially accounts for the rut in which plantation wages are caught. As is the case with coffee and cocoa, the forecast is that tea production will continue to increase over the next few years despite a slower growth in demand -- a trend that can only undermine prices in the long term. The present decline in prices was on the back of a 0.6% annual increase in production between 1984 and 1994 -- annual increase between 1994 and 2005 is estimated at 2.8%. One area in which tea differs from coffee and cocoa is that the world tea market used not to be particularly prone to price volatility.
Tea production is less prone than coffee and cocoa to peaks and troughs due to weather and disease. Also world production is fairly diversified and not concentrated in particular areas as is the case with coffee (Brazil) and cocoa (West Africa). The tea market is not undermined by the destabilising effects of speculation. Vertical integration and companies in monopolistic competition in consumer countries also stabilise prices (if at low levels). Price volatility is a necessary precondition for viable futures markets as it is only when price fluctuates that producers, traders and processors find that they need to hedge against price fluctuations. One analyst takes a rather interesting view on this, arguing that in the coffee and cocoa markets the existence of futures trading makes price determination very organised, centralised and transparent.6 By contrast the tea markets are not held around one international price but according to different auction prices in producing countries. complex, but the local pricing of each grade of each factory's produce means that the price of tea is more accountable to producers.The relative stability of the tea market was true until fairly recently -- there was a noticeable increase in the volatility of the markets in the 1990s.This volatility…