GLOBAL TEA MARKET

Global Tea Market



Global Tea Market

Part A: Global Tea Market Analysis

Question One: Explaining the following:

1) Production, Consumption and Exporting of Tea

2) Influence of Individual Growers on the Prices of Tea

3) Role of Transnational Corporations in Tea Market

Question Two: Explain Supply and Demand Factors.

Question Three: Prices Changes and its Effect over Country's Economies

The Economics of Tea

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. As the chart below shows, another problem has been price volatility. 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, and the instability index2 has averaged 13, which means that the price deviated from the exponential trend by 13% in any given year.

Price Decline

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). Instead stocks function more as a transitory 'pipeline' stage in the supply chain Competition between producer countries for a share of the world market is intense for a number of reasons, all of which contribute to low prices:

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 ...