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Deeptha Rajkumar

"One reason for over-supply is the emergence of a large number of bought leaf factories in the North India."

Wellington (Nilgiris) , Oct. 7

A progressive increase in the retention quantity of tea from 48 million kg (mkg) in 1997 to more than approximately 150 mkgs in 2003, has brought about a distortion in the demand-supply ratio in the tea industry.

According to the Tea Auctioneers Association of South India (TAASI), this has been the most significant factor contributing to the sharp decline in tea prices.

"This is one factor that has been overlooked while evaluating the reasons for the low price realisations in the tea industry. For, if we were to take into account carry-over or excess stock every year from 1997, all India tea production would be over an average of 1,000 mkg annually. It is that much more excess tea in the pipeline,'' a TAASI official told Business Line.

TAASI sources said instead of unfairly blaming the auctioneers or the "tea brokers" as they are also known, for the dismal prices, one needed to look at factors that had been influencing the demand-supply scenario.

"Today, the industry is facing an unprecedented situation of oversupply. One reason for this is the emergence of a large number of bought leaf factories in the North Indian tea-producing centres. Prior to the year 2000-2001, the production of tea from the bought leaf sector in these areas was very negligible,'' TAASI members said.

Sources said the shift occurred during the period 1997-1999 when tea prices were ruling very high, with many entrepreneurs entering bought leaf production operations.

However, produce from this sector started to appear in the market only from 2000. And, it is estimated that in that year the quantity produced was about 40 mkg. Subsequently, in 2001, it increased to 100 mkg and in 2002, to much more than 100 mkg. The quantities for this year are expected to be much higher.

The cost of production of these teas is much less than Rs 40. But given that the quality is of a useful standard (say having grown in Assam and Dooars) particularly in liquor, there are takers at about Rs 45. Thus, due to inherent quality advantage and a longer shelf life, North Indian teas are predominantly preferred in the domestic market and price fluctuations are at a minimum.

"A blender finds these teas to be of better value than buying the South Indian teas even at Rs 30, which has a lesser shelf life. It is also one reason why blenders have been reducing their offtake from the South Indian centres. This is yet another factor contributing to the sharp decline in prices over the last three years, particularly in the bought leaf sector in the Nilgiris,'' a TAASI official reasoned.

Unlike the North, where 80-85 per cent of the teas produced is consumed domestically with only 15-20 per cent earmarked for exports, South Indian teas are more dependent on exports.

"Fifty per cent of the total tea production in the South is exported. Hence, during the years when exports are down, tea prices in South India is invariably low. And, in 2003 we are facing a similar situation,'' officials said.

In response to allegations of artificially suppressing prices at auction centres, auction house sources said the infrastructural cost of a tea auction house was approximately Rs 50 lakh per annum and one required to sell at least 15 mkg to break even at the current price level. "Since our earnings are but a percentage of the sale price it is only to our advantage to ensure that the highest possible price is obtained for teas sold through us,'' they argued.

Today, South Indian producers sell on an average 79 per cent through auctions unlike in North India where it is only 49 per cent.

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