US, fast growing tea consumption market-Forbes report
View(s):Sri Lankan tea production in 2019, consequent to the Government’s decision to lift the ban on the use of glyphosate (weedicide) would provide much relief to producers and in particular large-scale plantations which would be able to carryout the required agricultural practices to achieve the full potential of the plantations, says broker Forbes and Walker Ltd.
File picture of a tea smallholder property.
“Further the Government’s decision last month – to allow a more liberal policy on fertilizer – should contribute favourably. Needless to say, subject to extreme weather conditions not being a reality,” it said in its annual review of tea for 2018 and the outlook for 2019.
Forbes said however, ageing tea bushes and low productivity levels would be a downside. Similarly, India with its aged plantations is unlikely to show any significant improvement in its output. On the other hand, Kenya with its steady growth in production in the past several years is poised to achieve a 500 million (M)/kgs in 2018 and is likely to play a significant role when assessing the total global supply situation.
“Demand growth in China and India, considering the magnitude of these two markets, is likely to influence prices and consumption is expected to outstrip production. The US too could be singled out as a fast-growing market, particularly for instant tea and iced tea segments, whilst imports from Sri Lanka to the US have shown quite a significant growth in 2018,” the report said.
Other factors that are likely to impact Sri Lankan tea prices:
- Colombo Auction prices have shown a significant appreciation in the 4th quarter and the 3rd quarter, particularly in respect of leafy orthodox teas.
- Further, the 1st quarter traditionally is a low cropping period with enhanced product quality from most producer countries. This scenario will augur well for small leaf liquoring varieties that would be on offer.
- Another important factor that might influence tea prices is the variation in exchange rates. The Sri Lankan Rupee, which was under severe pressure at the commencement of the 4th quarter 2018, stabilized somewhat towards mid-December. If this trend is reversed and the previous depreciation pattern that was seen a couple of months ago is a reality, this too would help Colombo Auction prices in rupee terms.
- Improved demand from Iran following the recent indications that tea would not be featured on the list of items attracting US import sanctions.
- Importers of orthodox teas are likely to have lower inventory levels in the backdrop of deficits accumulated since 2015.
These factors would enable Sri Lanka to predict an upward movement in prices, particularly in the 1st half for most varieties of orthodox teas. The market demand for teas thereafter, would greatly depend on how the global tea industry would progress during the 1st half. “As we have periodically highlighted, market demand for good quality teas would command a premium consistently throughout the year,” Forbes said.
The report said 2018 began with a lot of optimism in the backdrop of an excellent year (2017) that was witnessed in terms of tea prices. The 1st quarter commenced on a high, with the quarterly Auction average being recorded as the highest ever. However, as the year progressed, the Sri Lankan tea industry faced numerous obstacles.
Here are extracts of the report:
“Consequent to banning of glyphosate by the Government of Sri Lanka, tea growers and large plantations, in particular, were forced to use alternative products for the control of weed growth, resulting in MCPA levels higher than permitted for exports to Japan.
As the year unfolded, purchases from Japan declined due to purchases/shipments being made only following prior testing for chemical residue levels. This brought about a market – unrelated to quality – with greater emphasis on the MCPA levels and its suitability for the Japanese market.
In and around May, US sanctions on Iran were imposed which had a cascading impact on Auction prices in Colombo, particularly for the Low Grown (Tippy) teas. There was some optimism for tea prices to turn around towards June/July following the strengthening of oil prices and the weakening of the Sri Lankan Rupee. However, this too did not work out to be a reality following the weak economies in most West Asian countries and Russia, resulting in currencies in the importer countries also depreciating against the US Dollar.
During the 2nd half of 2018, there was ample evidence of global production increasing significantly, primarily due to increased production in the African region. These increases did not reflect too adversely on Colombo Auction prices, as most of the increase comprised of CTC teas.
After much deliberation, stakeholders were successful in negotiating with the Government of Sri Lanka to remove the glyphosate ban through a Special Gazette dated 11 July 2018, a welcome relief to the industry. However, the modalities have taken a considerable period of time for these shipments to be available for the plantations on a regulated basis.
Commencing around September 2018, the Sri Lankan Rupee began to show a significant devaluation against the US Dollar, which possibly to some extent made Sri Lankan tea prices attractive to importers. Since then, we have seen reasonable momentum although the current Auction price levels are below the corresponding sales of last year by approximately Rs. 50 or $0.27 per kg. Cumulative Colombo Auction average up to the penultimate sale stood at Rs. 619.11 compared to Rs. 582.17 in 2017, a variance of Rs. 37 per kg.
Overall annual growth is still around the same levels as were seen in the past couple of years. It is indeed promising to note that the agriculture sector has performed extremely well during the year, after two disastrous years. However, unfortunately, the Industrial Sector growth rates have declined significantly compared to 2017 and 2016, and the overall growth could not be accelerated beyond the present level.
Agriculture sector growth rates in the first two quarters of 2018 have seen a remarkable increase when compared against the previous two years. Paddy production can be identified as the major contributor for overall growth in this sector.”