Reading prices in the tea leaves

Press, 23 January 1984, Page 16

Reading prices in the tea leaves

From ‘The Economist,’ London

The Indian Government is looking for its fortune in the tea leaves. The price of tea on the London market has soared since Christmas Day when India placed an embargo on exports of cut, tear and curl (C.T.C.) tea: high quality tea that accounts for about threequarters of its exports. India is benefiting now, but in future?

Swirl the cup once. The first pattern for India is cheerful. It introduced the embargo, which is due to be lifted when picking of this year’s harvest begins, because in the nine months following the last harvest in April more than 150 million kilos of tea were shipped out of the country at a time when shortages were driving up prices in India.

Indian tea buyers are now paying less and foreign buyers more. At a January auction in London, tea fetched on average over £3.15 a kilo ($6.85), the highest price

ever. India sold 630,000 kilos of non-embargoed leaf at the auction.

Simultaneously, with the diversion of tea from the export markets into the Indian market, domestic tea prices at the weekly auction in Calcutta have fallen by more than 20 per cent since the export ban was imposed.

So it looks at first blush if Mrs Gandhi’s Government, which is keeping open the option of an early election, has cleverly forced the foreign tea drinker to subsidise its domestic tea prices. The British are the big losers. The tea market is dominated by trade between Indian plantations and British tea companies (often owned by the same concerns) and the Indian Government is gambling that demand for tea in Britain, which has risen by only about 1 per cent a year for the last decade, compared with 7 per cent a year in India, is inelastic.

Swirl the leaves a second time, and start worrying. Part of the steep increase in the tea price is the result of a peculiarity of the tea market: unlike the coffee and cocoa markets, the international tea market is nothing but an auction, held every week in London. Traders cannot plan ahead by buying tea for delivery in the future.

There has now been a badlytimed cut in supply during the first three months of the year when trading is anyway seasonally light. Most of India’s crop has already been sold at 1983 s prices. Those who are benefiting most are the competitors able to increase supplies to Britain. Sri Lanka, India’s biggest competitor on world markets, has allowed many of its plantations to run down, especially since its recent race riots.

So the big winners in the recent auction were Kenya, Malawi and other African producers whose quality teas are being bought as

acceptable substitutes for C.T.C. tea. Will India lose its market share permanently? Swirl the leaves a third time, and become more worried still. There has not been enough investment in India’s tea plantations for years because of low prices. Now, just as the companies were starting to make good profits, the Indian Government is ordering them to sell only in the domestic market where prices are being artificially depressed. When the plantations’ boards next meet to decide on investment policies, where will they plant new bushes? There is a precedent in the last decade’s “Soya shock.” In 1972, when shortages were driving up soya prices in America, the Nixon Administration imposed fierce controls on the export of soyabeans and other oilseeds. America then had a 94 per cent share of the world soyabean market and Brazil had 2 per cent. The controls, which lasted only three months, wrecked America’s

reputation as a reliable supplier. In the following years. Brazil increased the amount of land planted to soyabeans by nearly 40 per cent a year. By 1980. America's share of the world market was down to 81 per cent and Brazil's up to 7 per cent. A policy of keeping the price of a commodity such as crude oil low in domestic markets, and pushing it up on world markets, can make sense for a cartel of countries with soon-to-be-exhausted reserves which want to reduce domestic input costs and to maximise export earnings.

But it is in the over-riding, longterm interest of any single cashcrop producer to persuade as many people as possible to consume what it grows. India is damaging its own prospects, and boosting the prospects of its competitors, by gerrymandering the London tea’ auction to keep Mrs Gandhi’s voters sweet.

Copyright — The Economist.