Production, consumption, and exporting of tea

QUESTION 1(i)

Production, Consumption, and Exporting of tea

Tea, like coffee is a typical favorable beverage among many. Tea is therefore produced in many countries. The annual world production of tea is about 2.9 million tones. Countries that have the most production of tea and largest tea plantation are China and India, followed by Kenya and Sri Lanka. China is the only country that produces non fermented tea (green tea), semi-fermented tea (Oolong tea), and other various kinds of fermented tea which also includes black tea. In India alone, the tea production is about 750,000 tones.

Below are the total productions in tones of each country for the year 2006 and 2007

Tea is consumed around the world especially in British countries such as United Kingdom and Ireland, not forgetting the countries where tea is being produced. Tea is less favorable compared to coffee in countries such as America. Most of the tea consumed outside of East Asia is being produced in India or Sri Lanka. In Japan, green tea is a favorite for the locals, a mixture of green tea and hot water in a cup would do the trick for the Japanese. However, only green tea is consumed in Japan. Researches show that tea in terms of consumption is the most popular drink in the world.

Exporting tea is a very common thing to do, in fact, the largest exporter of tea in the world is Kenya. China and Sri Lanka also plays very important roles in this sector. The growth in the export of tea is not just because of the demand, but also the heavy response to promote health benefits of tea consumption.

QUESTION 1(ii)

The influence of individual growers on the price of tea

Individual growers are influenced by the price of tea. This is based on demand and supply. If demand for tea is high, growers and producers will then produce and supply more tea, on the other hand if the demand for tea is low, supply for tea by growers will also be less. Some Individual growers would also prefer to invest in the local market rather than export as to avoid heavy competition against other tea producing countries.

QUESTION 1(iii)

The role of transnational corporation in the tea market

The role of a transnational corporation is to manage production and deliver services in more than one country. This corporation also plays an important role in the tea market. Tea companies such as Unilever and Tata tea have made a huge impact on the world market by setting up their own plantations and factories. Exporting and importing of tea has to go through the transnational corporation as most transport and shipping companies are controlled by them, thus making a stamp on the role of transnational corporations in the tea industry.

QUESTION 2

Price of tea has been increasing since the year 2005, the demand and supply factors are the ones responsible for the increase. Despite the economic crisis in recent years, demands for tea has still been strong to many of its customers are an essential product. This is probably because of the health benefits from drinking tea. The demand for tea is income inelastic. However, some people may consider tea as an inferior good which is purchased at a larger amount compared to more expensive drinks, thus leading to an increase in price. China, one of the powerhouses in the tea industry is also growing in demand for tea as it has become one of the favorite beverages for the locals. Countries with rapid economic growth such as China, India, and Russia have resulted in locals with higher income, which will increasingly affect their spending behavior. They are allowing them to purchase branded and higher quality tea instead of cheaper and lower quality tea. As mentioned above, by being an inelastic product, increase in prices will not affect its consumers, as tea has its own alternative which requires small amount of income, therefore the rise in prices will not affect demand. As the demand for tea increases, the supply will also increase. This is based on the demand for tea as more people buy tea. Suppliers will then have to supply more tea in order to meet the requirements. Another supply factor would be the price of tea, as the prices of tea is increasing and still many people are consuming it, suppliers then have to supply more tea locally and in terms of export as this signals that they will make a profit base on the demand. Supply of tea is also affected by draughts. Those countries such as India, Kenya, and Sri Lanka are places where draught happens. Draughts will then lead to a lower supply rate of tea in these countries. Nevertheless, supplies of tea cannot easily be increases in a short period of time as that is the nature of the plant, thus affecting the world tea market by causing a rise in the price of tea.

Below is a chart which shows the world demand and supply of tea from year 2004-2007

Alexander, A., 2009. Market and Industry Report-Russian Tea Market Research Report. [Online Image].

Available from: http://www.russiablog.org/2009/09/russian_tea_market_research_statistics.php

[Accessed 03December 2009].

Among the countries that are famous for its tea production, India is one of the powerhouses in the tea market. Apart from dominating the world population as the second largest population in the world, India was also the second largest tea producer behind China during the year 2007. India also manages to produce an astonishing 945 million kg of tea that year. In terms of exporting wise, India came in fourth as the largest exporter of tea in the world with an exporting volume of approximately 178.75 million kg. In 2007, the Indian market size for tea is valued at $876.4 million and weighted 226.04 million kg. Retail prices for tea in India is very low compared to other countries such as Russia, for example, the average retail price of Indian tea is priced at $3.9 per kg , whereas it Russia it is priced at $20.2 per kg. This is probably caused by the exchange rate as the currency in Russia is stronger and more powerful compared to countries like India. Transnational corporations such as Tata tea and Unilever in India also help to play a role in the success of India’s tea industry. Plantations, processing factories, transport companies, and shipping agencies are all controlled by the corporation which helps the process of export and other actions smoothen. From year 2005-2008, the demand for tea has been exceeded by the supply in India. Not only in India actually, but the whole world which in this case supply has exceeded the demand for tea. This did not just happen accidentally, but rather intentional as it will help prevent the tea prices in India from dropping.

Below is a table showing the demand and supply of tea in India

2006 was the start where recent buoyancy happened to tea prices. This turned out to be a relieve factor for most bulk tea players as they have been suffering from low and depressed prices of tea since 1999. In the past, after prices of tea had reached a peak in 1998, it went into a steady decline which produced an average domestic price of 76.43 per kg in 1998 which continued to drop in price which was 58.05 per kg in 2005. India then went on and suffered a lost in export markets. Among the factors were lack of market initiative by Indian investors in search of export markets, failure to check spurious varieties of tea and graded them as premium, high quality tea which then affected the image of the Indian tea market, and higher cost of production compared to other rival countries. Factors like these have led to India losing out in the export market, nevertheless leading to an increased supply in the domestic market. Quality factors also play an important role in determining the price and export. The above can be good examples of why price of tea in India can be quite volatile from year to year. Price of tea can also be affected by natural disasters such as typhoon, flooding, and draughts. In which reduces the supply of tea thus lower export rates. Last but not least, economic factors such as currency rates or inflation are able to affect and determine the price of tea.

QUESTION 3

A change in price of tea would affect the economy of a country. Take India for example, an increase in the price of tea would mean good profit returns for the tea market as well as an advantage for bulk tea players who have invested large amounts of money into the tea industry. An increase in the price would mean that they have made a profit whereas if the price decreases, tea players would then suffer a loss. Judging from all areas, an increase in the price of tea would not fully bring benefits to the economy of the country. If the price increases, therefore cost of production for tea would also increase. When this happens, not all tea industries in India would want to export their tea as it may be too costly at their expense, which will lead them to invest in the domestic market. If there is a drop in price, transnational corporations such as Tata tea and Unilever will then take necessary actions to increase the price to a stable condition. A drop or increase in price will also affect the economy of India tremendously as India is one of the powerhouses in the world tea market, therefore little changes could make a big impact on the country. When competition for tea is too high in the market, price of tea will be affected negatively as there are too many suppliers comparing with each other in order to overpower the tea market. On the other hand, if competition for tea is low, this automatically raises the price of tea due to low supply. If demand for tea is high, wages of workers will increase as more workers are needed at the plantation and other tea processing facilities. Wages or workers in this case are determined by competition of tea as well as market power. In order to obtain market power, strong firms such as Unilever and Tata tea should be certain of a few items, tea that is either sold domestically or for export purposes should be of quality tea leaves, this is important as it can gain the trust and confidence of customers domestically and abroad. Tea corporations should also control the volume of tea being sold or exported as they would like to meet the requirements of the demand and supply situation, too much tea being produced would result in wastage. Supply networks also helps build up market power in the corporation, for instance, corporations should have export agencies to assist them in matters regarding export of tea to other countries. Overseas agents should also be hired as they can work as a link between the domestic market and overseas market, agents overseas can also help by sourcing and delivering information regarding other corporations which are in the same business. This can then help the domestic corporation plan their market strategies better. If the tea corporation has succeeded in obtaining a big share in market power, wages of workers in the corporation will increase simultaneously as they are crucially needed in order to smoothen and fasten the process of production of tea. Each step in producing tea will require manpower. Therefore workers are crucial at this stage.