Mystery surrounds new international tea cartel

Six major international tea producing countries joined forces last week to form a new tea cartel. But does this mean a price of a cuppa will rise or fall?

India, Kenya, Indonesia, Malawi, Rwanda and Sri Lanka make more than 80% of the world's tea. Last week they agreed to form the International Tea Producers Forum, an organisation they said was aimed at stabilising prices, promoting the beverage and ensuring sustainable production.

The problem is their manifesto for a brighter future for tea included little beyond setting up a committee in November.

"We are trying to achieve a growth in the world market so tea can become more popular and that can stabilise the prices with a consistent growth," said Deepak Atal, managing director of Amalgamated Plantations, the second biggest tea producer in India.

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 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."


Co-operation in tea rounds

The forum's founding nations, which produce about 1.9 billion kilograms of tea a year, face similar challenges to each other - such as labour shortages, climate change and a need to improve agricultural practices.

But despite sharing problems, achieving production quotas or price fixing is incredibly unlikely, thanks to the different varieties and amount of tea 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 Amalgamated Plantations’ Atal.

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

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, in an auction.

According to the Tea Board of India, tea prices in India have risen about 40% in the past 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 a kg (£1.43) in 2012, slightly higher than $2.23 (£1.42) 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.

More harm than help

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% 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 organisations, 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.

More tea?

Against these odds, industry experts say the cartel is likely to succeed in one of its aims – its goal of maintaining tea's popularity. But only because tea is already the world's favourite brew.

Global tea consumption growth slowed down in 2007 before picking up three years later at about 6%, compared with coffee at about 4%.

World tea production is estimated to grow at 1.87% a year for the next 10 years, the United Nations' Food and Agriculture Organization said in 2012 to reach 3.28 million tonnes by 2021.

 (Additional reporting by Ranga Sirilal in COLOMBO; editing by Lewa Pardomuan, Miral Fahmy and Yahoo! Finance UK)

[Source: Reuters]