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DEMAND FOR TEA EXCEEDED THE SUPPLY, DRIVING UP ITS PRICE
(A Case Study Analysis)

Presented to the Faculty of
NATIONAL UNIVERSITY
COLLEGE OF BUSINESS AND ACCOUNTANCY
Manila, Philippines
under the advisory of
Prof. IRENEO R. AGUILAN

In Partial Fulfillment
of the Requirements for the Subject
MACROECONOMIC THEORY
1st Semester, AY 2012-2013

Presented by

Baja, Mark Joseph E.
Buenaventura, Ariel B.
Gabito, Charlene T.
Tullao, Perlene Marie G.
Young, Camela M.

September 10, 2012

I. INTRODUCTION/ HISTORY

The tea market is dominated by five countries, Kenya, Sri Lanka, China, India and Indonesia, which export about 80% of the world tea. Apart from China, the rest mainly produce black tea. In 2004, the world’s net import of tea was 1.42 million tonnes, out of which 1.17 million tonnes (82%) was black tea (Anonymous, 2000-2003). In contrary, the growth rate in world black tea consumption was reduced to 2.2% during 1993-2003 (FAO, 2005).

The imbalance situation between the level of demand and supply of tea is a big threat for the tea producing countries, due to decline in prices. Similarly, the depressed price situation has been intensified in Kenyan tea industry due to high production cost (Gesimba et al., 2005). The impact was also enormous on price recovery of Indian tea traded through auction and was ruling below the cost of production (Anonymous, 1998). Previous studies revealed that decline in tea price had negative impact on tea industry in Sri Lanka mainly due to soil degradation and poor productivity (Iqbal et al., 2006). In Indonesia, the market price situation affected the income level of smallholders drastically, which constitutes the largest sector of tea industry (Yuliando and Nakayasu, 2006).

All government of tea exporting countries plans and policies recognize that tea is an important export commodity and that it has high potentials to contribute to national income, employment and environment protection. Teas, from the camellia genus, come in two main categories: orthodox/green (leaf) tea and black tea/CTC tea. The former is produced in the hills for export and is available only in limited quantities, while the CTC tea produced in the urban areas is mostly for domestic consumption.

Having examined the consumption and production links that set the demand and supply trend of tea, United Nations Food and Agriculture Organization (UNIFAO) declared a shortfall of tea in 2008. Demand for tea of 3.85 million tonnes but with only 3.78 million tonnes of production suggests a shortfall. Noticing the scenario from 2007 surplus going to successive year's shortfall, it seems that this shortage could go up until future years.

The analyses show that tea farming and manufacturing is competitive and there are important direct and indirect benefits from tea growing. Yet, the area devoted to tea production is still very small due to some structural constraints and policy anomalies that need to be addressed for the growth of the sector. The supply-side constraints (not having enough surpluses or inability to expand production) for various reasons, natural, man-made and lack of competitiveness in the international market (cost and quality) or due to structural and policy reasons and barriers to trade and in this case, drought - that hit hard the major producing countries of tea which are Kenya, Sri Lanka and India in 2007.

Moreover, such case has soared the price of tea, citing the difference between 2007 and 2008 census of average price of tea. Kenya's tea board reflects almost a third higher per kilogram basis of tea showing US $2.33/kg compared to 2007's US $1.76/kg. This has caused the more expensive black tea to jump to a record of US $2.70 last august, 2008.

It is, therefore necessary to take appropriate measures to improve the current price level. A supply management is considered as a key to influence the market price. Principally, it is an adjustment to fit the level...
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