The commencement of the year 2023 (1st Quarter) would perhaps be much-awaited by all stake-holders, particularly from a production point of view with the revoking of the ban imposed on the usage of chemical fertilizer on tea plantations.
The expectance of a higher crop intake alongside an improved Western Quality Season compared with previous years are certain elements that would undoubtedly provide the forthcoming year a positive note to commence upon.
We analyse below the supply and demand situation that exists and project likely market scenarios taking into consideration recent developments in importer countries.
Tea production in almost all producer countries have shown negative growth in 2022 vs. 2021 with Sri Lanka recording the steepest decline of 44-48 M/Kgs (15%-17%) year-on-year.
Historically, a low production year usually follows with an improvement in crop and therefore, assuming that the output in most producer countries would improve in 2023, we are projecting a firmer growth in global tea production during the forecasted period. However, an area of concern would be the rising input costs, meaning that in inflation adjusted terms, farmer profits would remain lower than in the past.
Governments in tea producer countries will no doubt have to improve efficiency of production using digital technology to lower production costs, tackle labour shortages and improve supply chain management. Such would reap dividends in production growth in the medium to long term as the roll out would be gradual.
In projecting tea prices, the following would be salient factors for consideration.
- Consumption growth is estimated to have surpassed production in 2022 and the market surplus is likely to have narrowed more so for Orthodox teas considering the significant shortfall in crop in Sri Lanka (i.e. low inventory levels in most importer countries).
- The main tea consuming countries are also the largest producers and in recent years a rising share of output has been retained for domestic consumption.
- Asian consumers continue to dominate tea consumption, in particular China and India, which are estimated to account for over 50% of the global demand.
- The forecasted tea consumption growth in India is anticipated to be relatively firm in 2023 following an improving Corona virus situation compared with 2021.
- Chinese consumption is likely to grow showing a preference for black tea. Although ready-to-drink products were rising firmly before the pandemic, analysts predict that quality loose tea will continue to dominate the local market.
- The US market for tea though small is expected to show a fairly firm growth in consumption. However, with most of the larger tea markets dominated by loose-leaf tea; the US remains one of the most important single markets for instant and iced tea, and perhaps handcrafted specialty teas.
- The recent reduction in freight costs and the likely tendency of a weakening of the Sri Lankan Rupee would be an added advantage for importers of ‘Ceylon Tea.’
Combining these factors, due consideration needs to be given to the fact that the 1st quarter is a lean period for almost all producer countries and from a Sri Lankan perspective, the traditional Western Quality Season experienced during this time of the year lends towards an improved availability of better-quality teas.
In the absence of a global measure of tea stocks, predicting tea prices becomes a near impossibility. Therefore, if the supply and demand equation would be a deciding factor, it would be reasonable to assume that prices in respect of Large Leaf Orthodox teas would sustain at these levels, perhaps even as a worse case scenario. However, prices for Orthodox Rotovane (Small Leaf liquoring teas) would largely weigh on the recovery of tea production in North India which is likely to be regularised in the 2nd quarter of 2023.
In these circumstances, rupee tea prices are unlikely to show a dramatic change from its current levels up until the end of the 1st quarter 2023 and perhaps on a cautiously optimistic note, we could expect these levels to remain until around mid-2023 subject to any unforeseen circumstances. Tea prices thereafter would largely depend on the supply scenarios that unfold during the 1st quarter of 2023.
Amidst the optimistic outlook for prices, the industry continues to be challenged with constant wage increases and lower rates of mechanization and more recently, the sharp rise in finance costs which would continue to undermine the competitiveness due to higher average production costs than other large producer/exporter countries.