Indian Tea Association Suggests Introduction of a Minimum Floor Price

The Indian Tea Association (ITA) said that there is a need for introduction of a minimum floor price for made teas and green-leaf benchmarked to quality. The floor price would account for production costs, ensuring a self-sustaining model for all producers, large and small.

Tea prices are currently governed by demand and supply in the system, so when crop prices fall and production decreases, prices rise.

ITA hired the consulting firm Ernst & Young and the law firm Khaitan and Co about six months ago to analyze the industry and provide a road map for self-sufficiency.

According to Vivek Goenka, Chairman of the ITA, the study should be completed within the next two to four weeks, after which the Association intends to present the study's findings and recommendations to the Ministry of Commerce and state governments. It recently presented the initial paper to the Union Commerce Minister.

"Do not confuse this minimum floor price with the minimum support price". Unlike the MSP, this proposal does not require any financial outlay from the State or Central Government, and ensures a self-sustaining model for all producers, large and small," Goenka said at a virtual press conference on Wednesday, on the occasion of the Association's 138th annual general meeting.

High Cost of Production

Currently, nearly half of all tea produced is sold below the cost of production, which is around $220-240 per kg. The average auction price of tea increased from 125 per kilogram in 2012 to 140 per kilogram in 2019. The Covid-induced lockdown during peak plucking months, as well as the resulting loss in production, caused a price increase in 2020. That, however, was only for a limited time. Tea prices in 2021 have crept closer to those in 2019.

"With a CAGR of around 4% in the 2012-2020 period, the increase in tea price has been outpaced by the corresponding increase in input costs ranging between 9-12% and wages, which have more than doubled during this period."

What is truly shocking is that, in real terms, tea prices have actually decreased during this period. "The industry cannot be sustainable and produce quality teas at the current price levels," he explained, explaining why a minimum floor price is necessary.

Need to Boost Domestic Consumption, Exports

According to a Deloitte study conducted under the auspices of the Tea Board, per capita domestic tea consumption in India is estimated to be close to 786 grams, which is significantly lower than that of a large number of tea-consuming countries.

Anecdotal evidence suggests that, while out-of-house consumption decreased during the pandemic, in-house consumption increased significantly, which may have offset any overall decrease. ITA anticipates that once some semblance of normalcy returns, normal levels of consumption will follow.

Concerns about Surplus

In India, the average tea production is around 1350-1400 million kg (mkg). Domestic consumption is estimated to be around 1050 mkg, with exports being around 200-225 mkg. This results in a yearly surplus of approximately 75 mkgs entering the system. Unless this surplus is addressed, the surplus stock will continue to accumulate, eventually leading to an oversupply situation and lower prices.

To maintain the demand-supply equilibrium, export volumes must be increased to close to 300-350 mkg over the next three to four years, he said.

There are several approaches to increasing exports. First, there are markets where India already has a strong presence, such as Iran, Russia, and China. However, there is room for further expansion and increased market share in these markets.

Second, there are several untapped markets, including Iraq and Egypt, where India once had a strong foothold but lost to competitors. These markets have enormous potential for increasing export volumes.

"We may target two to three such markets each year and work on them continuously." The need of the hour is for industry and government to collaborate in market identification, trade delegations, buyer-seller meetings, and, most importantly, a sustained promotional campaign in such targeted markets to boost exports and the brand of Indian tea," he said.

ITA has provided a detailed strategy paper to the Tea Board of India in order to increase exports and looks forward to working with them in the coming days.