Storm In Your Tea Cup: Tea Growers Seek Minimum Floor Price

The tea industry serves the livelihood of over 1.2 million people and an additional million or more indirectly.

Tea prices over the years have experienced a relatively lower growth compared to other key cash crops and commodities, the latter aided by the minimum support price mechanism. 

In contrast, the cost of production of teas has risen sharply due to increased fertilizer and energy costs along with higher wages – all of which are beyond the control of tea growers. 

In the last four to five years, sales of tea have rarely been able to match the rising cost of production.

 As of now apart from dust teas, no other variety is mandatorily offered through the auction system. Thus, on an average around 40 per cent teas produced get sold through auctions. 

One of the reasons for such lower offtake is due to the fact that more than 52 per cent of the tea growers are small. Since their cash flows are challenged at all times, they are often compelled to offload their produce at lower prices. 

With bulk of teas sold off through the twin methods described, the quantities that get offered at the auctions are relatively low, invariably failing to attract better prices and often sliding below cost of production. Of course, barring times when productions are down largely due to natural causes, prices get enhanced due to a relatively stronger demand from auction buyers who rush in to supplement their requirement domestically as well as meeting export commitment. 

If one were to look at the pattern of production and auction sales, it is evident that more than 60 per cent of the total production and sales through auctions takes place between June and October. International prices during this time remain stressed pushing the buyers to bid lower.

Irony of Global Pricing

The irony of the situation is that even as about 85 per cent of the teas produced are consumed indigenously, tea prices in India are invariably influenced by the international scenario. 

Over the past two decades, global tea supply has been higher than demand. The exception has been the two pandemic years where demand outstripped supply primarily because people remained mostly indoors and drank more of this beverage. 

On the other hand, production slowed down and that fertilizer prices shot up during the period did not help  output to get back to normal levels. Post Covid, supplies improved as production went up. The aberration notwithstanding, by and large, tea prices have maintained almost similar levels with producers having to contend with escalating production costs.

In India, the total production is a little over 1,350 million kgs with the exportable surplus being around 250 million kgs. 

The pipeline stocks annually have remained anywhere between 40 to 50 million kgs. The upshot of all these is that average tea prices domestically have barely managed to exceed production costs.

It is because of this that the producers have been seeking a positive response from the government to implement a minimum floor price (MFP) mechanism in the auctions so that the cost of production is protected.

Minimum Floor Price for tea growers?

Importantly, unlike the minimum support price, the MFP does not impose any financial liability on the government. 

The objection to the MFP is largely coming from the bigger buyers on the ground that the domestic consumers will have to pay more as MFP will tend to raise the price levels in actions. Also, in support of their argument, the big buyers are citing the failed experiment of a minimum floor price in Africa. Kenya had suspended its minimum price policy set three years ago in 2021 to support farmers amid an over supplied market. It was meant to support the small farmers. The policy boomeranged as buyers shunned the lower quality teas at the price which they perceived as inflated at that time. 

It is however, unreasonable to equate the African market with India. The consumption of teas in the African market constitutes about  7 - 8 per cent of local production with almost 92 per cent of teas being eported. On the contrary, domestic consumption in India is well over 85 per cent.

Overall consumption levels in the past years have recorded growth levels between 2 to 3 per cent annually. Price fluctuations at auctions hardly ever impact domestic consumption significantly. 

Endorsing the implementation of a minimum floor price in India has significant advantages for all stakeholders. First the fear of production going up significantly is something that may not happen in a hurry– past records have shown that. 

The internal consumption as of now still leaves an exportable surplus of around 250 million kilograms annually. If at all, a better price mechanism helping to cover the cost of production will only spur growers to make higher volumes of better quality teas. The benefit of quality production will percolate down to the farmer levels, who will get better remunerated. Even if there is excess production, these can be routed to exports.

Protecting Bottomlines

According to C K Dhanuka, Chairman, Dhunseri Industries Limited, one of the largest tea producers in North India, a minimum floor price along with a restructured auction system will go a long way in making the tea industry sustainable.

While producers will be able to protect their costs, production of better quality teas will fetch better prices raising profitability, which in turn will go on to better the pay packets of the farmers and help funnel investments towards enhanced maintenance of plantations and improve overall sustainability of the industry.

Dhanuka has underlined the need to tweak the auction system to accommodate a two-tier process. Whereas the frontline auction system (named as Action A) would take care of the quality teas sold at MFP and above, those which do not find buyers here will be relegated to Auction B where they get sold at lower prices. At best these will add an additional 50 million kgs or so to the varieties that are of lower quality.

But these can find markets in countries which absorb such teas from other producing nations as well. The potential market for inferior varieties of tea in the world is about 400 million kgs. A focus on such markets for the low quality teas can increase India’s overall exports which will in no way hurt the domestic market or domestic consumption.

A floor price mechanism is crucial to the growth and long term viability of the Indian tea industry. This will also increase the auction volumes significantly as the demand for better quality teas will go up. The Indian consumer is not shy of consuming better quality teas. Given the growth in the packet tea markets in India, it is quite clear that the domestic market has enough appetite for quality teas. 

(The author is a senior independent journalist and a tea industry analyst. Views are personal)