Go to the Globe and Mail homepage

Jump to main navigationJump to main content

An employee shows locally-produced Sri Lankan tea at a shop in Colombo January 23, 2013. The world's six largest tea-growing nations have formed an international organization to promote and develop the commodity and ensure its production is sustainable. (DINUKA LIYANAWATTE/REUTERS)
An employee shows locally-produced Sri Lankan tea at a shop in Colombo January 23, 2013. The world's six largest tea-growing nations have formed an international organization to promote and develop the commodity and ensure its production is sustainable. (DINUKA LIYANAWATTE/REUTERS)

Can tea cartel be more than a storm in a teacup? Add to ...

Brewing a tea cartel is proving more difficult than a cuppa for six major producers of the world’s most widely consumed beverage, who last week decided to join forces without explaining exactly what they planned to do.

India, Kenya, Indonesia, Malawi, Rwanda and Sri Lanka, which account for more than 80 per cent of the world’s tea output, agreed in Colombo to form the International Tea Producers Forum, an organization they said was aimed at stabilizing prices, promoting the beverage and ensuring sustainable production.

More Related to this Story

Their manifesto, however, had few precise mechanisms – an executive committee would be set up in November – and industry experts say any attempts to act like a real cartel and control prices or limit production will be stymied by the complexity of the commodity and the piecemeal nature of its market.

The forum’s founding nations, which produce about 1.9 billion kg of tea per year, face similar challenges such as labour shortages, climate change and a need to improve agricultural practices.

They are unlikely, however, to agree on production quotas or price fixing mechanisms due to the different varieties, and amounts, that each nation produces.

“Nobody will accept a quota. What you produce, you have to sell. Tea cannot be stored. Tea is perishable commodity. So no country will ever accept a quota,” said Deepak Atal, managing director of Amalgamated Plantations, the second biggest tea producer in India, the world’s third biggest tea exporter.

“You will compete in the world market and sell your tea.”

Kenya is the world’s biggest tea exporter, according to the latest data from the U.N. food organization, followed by China, which has been invited to join the forum as an observer.

The forum is the first attempt to create unity among the world’s main tea producers since a cartel was formed 80 years ago to lift price by curbing exports. The measure worked, and prices rose by more than a quarter within six months.

Back then, British firms such as Finlays controlled most of the tea trade, but today’s tea market is filled with a plethora of sellers hawking a vast array of varieties, which complicates any attempt to control exports and prices.

“In 1930s, the industry was controlled by few British companies. They owned tea gardens in multiple countries. That’s why it was easier to agree on exports curbs,” said a TEA? broker based in Kolkata, capital of West Bengal state which is one of the country’s main tea growing areas.

“Today there are hundreds of tea garden owners and exporters.”

Unlike other commodities such as rubber or sugar, tea has no futures market and no benchmark grade, which makes pricing largely arbitrary. Physical tea is often sold on a weekly basis, via auction.

According to the Tea Board of India, tea prices in India have risen about 40 per cent in the last five years, but during the same period, rubber, wheat and sugar cane prices have more than doubled. Average Indian black tea prices stood at $2.25 (U.S.) a kg in 2012, slightly higher than $2.23 a year ago.

“The quality of tea is different in each country, and even within a country, so benchmarking them is not possible,” said Gopal Poddar, chairman, Limtex India, a producer and exporter based in Kolkata.

Past experiences also show that a cartel could work against the producers.

The International Natural Rubber Organization broke up in 2000 after major producers Thailand and Malaysia pulled out, saying the forum was not doing enough to support prices.

The now defunct Association of Coffee Producing Countries tried to stop prices from falling by proposing producers hold back 20 per cent of exportable coffee in a plan agreed in May 2000. The scheme was scrapped 16 months later because it failed to have an impact.

“Governments can discuss issues and form organizations, but trade takes place between companies. Convincing them to sacrifice their profits is not possible,” said a veteran Indian tea industry official, referring to the cartel.

Against all these odds, industry experts say the cartel is likely to succeed in its goal of maintaining tea’s popularity, but only because it really is the world’s favourite brew.

Global tea consumption growth slowed down in 2007 before picking up three years later at about six per cent, compared with coffee at about 4 per cent.

World tea production is estimated to grow at 1.87 per cent annually in the next 10 years, the United Nations’ Food and Agriculture Organization said in 2012, slightly lower than the 1.99 per cent pace over the previous decade to reach 3.28 million tonnes by 2021.

“We are trying to achieve a growth in the world market so tea can become more popular and that can stabilize the prices with a consistent growth,” said Amalgamated Plantations managing director Atal.

“There should be cooperation on common issues, common channel for promotion of tea as a generic commodity.”

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories