Also, though tea prices have risen by 25-40% on an average, industry executives say that lockdowns in the tea growing regions coupled with irregular movement of cargo and a drop in crop size is affecting the cash flows of tea companies.
“It is still raining heavily in Assam and North Bengal. This is going to impact crop size further in July,” said Sujit Patra, secretary, Indian Tea Association.
Last year, the tea estates of North Bengal and Assam had produced 370 million kg of tea in the January-June period. According to industry estimates, this year the crop size will be around 235 million kg in the first six months, a shortfall of 135 million kg.
“A shortfall in crop may push up prices temporarily, but whether that price trend will continue throughout the year is a big question. A huge fall in tea crop is unlikely to help the tea companies much as the cost of production does not come down,” said Patra.
J Kalyanasundaram, secretary of Calcutta Tea Traders Association, said prices of some teas have increased by 60% or more. In fact, this year prices of all qualities of teas have seen a price hike.
Rating agency ICRA said that since tea is a fixed-cost industry, a decline in production is likely to increase the cost of production by Rs 25-30/kg for tea producers in Assam and West Bengal, assuming no increase from the current wage rates.
Tea production, particularly in Assam and West Bengal, was hit in the March-May period due to restrictions on labour deployment to curb the spread of Covid-19.
The crop that has been lost is primarily of the first and second flush – which are the best quality teas for the year. Such teas are in high demand from packet tea companies to ensure the quality of blend in the packet. The dearth of such quality teas has resulted in the sharp increase in prices.
With July being the start of the peak production months in Assam and West Bengal, prices are expected to moderate going forward. However, the extent of moderation would depend on the level of demand – both in the domestic as well as export markets.
ICRA said that though current prices are substantially higher than last year’s, the volume of tea sold has reduced, thus impacting the cash flow of tea companies. Consequently, the credit profile of Assam and West Bengal bulk tea players remains under stress.