Floods in Eastern India and Covid-19 Impact Tea Production; Prices Rise

Tea production has taken a hit of at least 10 per cent bringing down inventory levels, due to the floods in Assam. Fall in production, coupled with the impact of extreme weather on inventory, has led to tea prices rising by anywhere between Rs. 100 per kg to Rs. 150 per kg at farm gate and wholesale levels. From a normal inventory of 90-100 days and a peak of 140-150 days, current inventory levels with the industry stand at a mere 40-50 days. Fresh and peak tea production takes place during March to June, which has fallen due to the lockdown by anywhere between 140 million kg to 170 million kg.

 

The annual tea production in India stands at roughly 1.35 billion kg. The Siliguri auction average price, which was Rs. 159 per kg garden tea in 2019, has now increased to Rs. 241 per kg, while the Assam auction average rose from Rs. 175 per kg last year to Rs. 278 per kg this year. Currently, West Bengal and Siliguri garden tea prices are averaging from Rs. 240 per kg to Rs. 350 per kg. The impact of extreme weather on the inventory lying in warehouses in Assam and West Bengal is also behind the price rise. Industry representatives say that the recent floods in Assam have only added to the woes that began with the lockdown, announced in the country in March to curb the spread of the Covid-19 pandemic.

 

Apparently, March to June is the period when most of the fresh tea is produced for the year. However, due to the lockdown there has been a major fall in production, which was also aggravated by unfavourable weather. The price hike, however, has been offset by loss in production, thereby bringing down the overall revenue for the tea companies and traders. Overall, there has been a 40 per cent fall in production till June due to the lockdown. Tea production fell after plucking came to a halt due to the prolonged lockdown, which led to leaves growing beyond a desirable size. As a result, instead of plucking, plantations had to resort to skiffing (removal of large tea leaves from the top), leading to loss of crop. 

 

Courtesy: TBEA’s Mombasa Tea Market Report (Source: https://www.msn.com)

Unilever’s tea demerger leaves questions brewing over Lipton

Unilever’s (ULVRL) plan to split its tea operations has raised questions among analysts about how it will handle Lipton tea, a major brand that straddles both parts of the business. The consumer goods group said on 23 July 2020 that it had concluded a near seven-month review of its 3 billion euros ($ 3.5 billion) a year tea operations with a decision to keep its Indian and Indonesian units, as well as its joint venture with PepsiCo. The rest of the tea portfolio will be spun off into a separate entity that will include PG Tips and Pukka Herbs teas.

 

Some analysts think Unilever will eventually look to sell this business or bring in a minority investor. Unilever launched the tea review due to a slowdown in black tea sales in the United States and Europe as consumers shift to herbal teas. But any sale could create problems for the Lipton brand. Lipton is big in India and Indonesia, and is also an integral part of the joint venture with PepsiCo (PEP.O), which was formed to sell ready-to-drink Lipton ice tea bottles at retailers, restaurants and schools. The brand is also important to the black tea business.

 

Chief Financial Officer Graeme Pitkethly said Lipton’s intellectual property was under review, but that the company had yet to come to a decision about what to do with the brand. “They are willing in principle to sell the Lipton brand (with developed markets), why do they want to keep the Lipton ice tea business?” asked Jefferies analyst Martin Deboo, adding one option would be to sell the brand to a third party and license it back for the Indian and Indonesian businesses.

 

However, complications arise with the Lipton-focussed joint venture, where Unilever owns half a stake with PepsiCo. Another analyst, who did not want to be named, said Unilever could sell its part of the venture to PepsiCo. But that would mean losing part of a lucrative business that finance chief Graeme Pitkethly described on 23 July 2020 as “extremely successful” and which Unilever identified in its review as worth keeping.  

 

Courtesy: Mombasa Tea Auction Report

About F&W

Forbes & Walker was set up in 1881 as a partnership between James Forbes and Chapmen Walker. Although there is no actual record of the date on which it was established the very first cash book, still in the possession of the Finance Director, indicates the brokerages were earned from 1st August 1881. In Sir Thomas Villiers' book “Mercantile Lore” the date of establishment of Forbes & Walker has been put down      Read More...

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