Gold & Silver Forum - Tea prices to soar after droughts

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Tea prices to soar after droughts

By Javier Blas in London
Published: March 30 2009 20:09
Last updated: March 30 2009 20:09

Tea prices are set to jump to a record high after damage to production in the main exporting countries from simultaneous droughts, the United Nations� Food and Agriculture Organisation and industry executives have forecast.

Kaison Chang, a tea specialist at the FAO in Rome, said dry weather had led to low yields in India, Kenya and Sri Lanka. �Prices should go up,� he said.

The output fall in the three countries, which account for half the world�s exports, will exacerbate last year�s market deficit.

The FAO�s preliminary estimates for 2008, seen by the Financial Times, indicate that consumption rose to 3.85m tonnes, up 4.8 per cent on the year, while production lagged behind at 3.78m tonnes, up 1.2 per cent. The market was in surplus in 2007.

The lower production comes amid relatively robust demand, even though some emerging countries� wholesale buyers have reduced the size of their purchases amid restrictions on credit, industry executives said.

Unlike coffee, tea does not trade in a futures exchange and the business is based on physical deals.

The main supply problem, the industry says, lies in Sri Lanka, the largest exporter. Production on the Indian Ocean island is set to drop to at least a seven-year low after the drought. Output will also suffer from farmers cutting the use of expensive fertiliser.

In Kenya, the tea-rich region of the Rift Valley has also been hit by a drought, and prices at the weekly auctions in the port city of Mombasa � the global benchmark for the industry � have risen to $3.40 a kilogram, up 15 per cent since December.

The precipitations of Kenya�s so-called �long rains� season, which run from March to May, have yet to arrive in growing areas. The Tea Board of Kenya, the industry regulator, last week forecast that the dry weather would restrict the country�s production to 328m kilograms, down 5 per cent from 2008.

Political unrest last year in Kenya, with farmers in the Rift Valley being displaced, also curtailed production. Wholesale black tea prices in Mombasa surged last year to an average of $3.10 a kilogram, almost 11 per cent higher than in 2007, and the highest annual average since at least 1993.

India�s tea output has also been hit by droughts in Tamil Nadu, Kerala and Karnataka. Industry executives that production fell about 35 per cent in the first quarter of the year compared with the same period of 2008.