Financial Daily from THE HINDU group of publications
Tuesday, May 28, 2002
Agri-Biz & Commodities
Columns - Plantaion Panorama
S. Indian tea in for glut-induced crash
COONOOR, May 27
THE tea trade in the South, more so, in the Nilgiris, has collapsed with the producers refusing to sell below Rs 35 a kg at the auctions and the buyers refusing to buy at that price. Around 70 per cent of the 14.21 lakh kg of teas offered for sale this week was withdrawn for want of bids above Rs 35. This comes on top of an unprecedented 80 per cent withdrawal in the previous week for the same reason.
The Indco factories have advised their respective auctioneers not to hammer off their teas if the bids fail to reach Rs 35 a kg. "This has seriously affected our business as our income depends on the one per cent commission we get on the sale realisation", lamented a senior auctioneer.
Producers firmly believe that the buyers are playing the market down. Since the consumers continue to pay the same price of over Rs 100 a kg at the retail shops, there seems to be no logic for the buyers to bid lower than Rs 35. Even this leaves an unexplained margin of Rs 65 a kg after allowing for factors as packaging, transportation, taxes, wages, blending costs etc. The underlying message is that if the consumers pay Rs 100 and above even now, the buyers should share much more with the producers and not exploit the growers.
But, the buyers contend that they would happily buy teas for Rs 35 and above if only they matched the quality requirements. Even now, some teas are bought for Rs 45 and more at the auctions. The point is that these teas would fetch this level of price irrespective of the Rs 35 floor price fixed by the producers. The buyers argue that if they buy most of the teas at Rs 35 a kg, they would not be able to sell them profitably in the upcountry markets in the present low ebb.
So, even as the Nilgiri producers are sending a message to the buyers in the country that they would not be selling teas below Rs 35 a kg, the buyers are sending a counter message to these producers that as much as 70 per cent of the teas they offer for sale are not worth Rs 35. And, the auctioneers complain that following a unilateral ceiling imposed by the producers, even teas which fetched Rs 36 or Rs 37 in the previous week, now get an offer of only Rs 35. In other words, the minimum selling price has become the maximum bidding price for some teas.
A major set back to the tea auctions in the last two and a half months has been the absence of serious buyers for Gujarat market. Ever since the Gujarat tragedy, the traders from the State are conspicuously absent at the auctions. These traders are known to be buying some 20 per cent of the high liquoring grades as BoP, BP and BPS at prices above Rs 45 a kg. Now, this much of these teas remain unsold. For these buyers, it is not the ceiling of Rs 35 a rider - they want business normalcy in Gujarat to operate here.
Equally disturbing is the near total absence of the demand from exporters. There is presently no worthwhile enquiry from Russia, the largest importer of Indian teas or for that matter from the CIS as a whole. Similar is the case with Poland, Europe, the US and West Asia. Consequently, even the best high grown orthodox dusts which are high priced are losing Rs 5 a kg week after week. The lower grades are losing a couple of rupees. Even as the auctioneers admit that there was a better participation of the buyers this week over the last week after the sticking to the Rs 35 a kg norm, they are firm that the plainer teas remain unsold. That means, the buyers do come in large numbers but they want only quality teas.
However, the biggest boost for the market comes from the Indcoserve. This apex co-operative body has been instructed to buy teas for the Tamil Nadu Government's "Ooty Tea" project. Presently, the Indcoserve is buying about 300 tonnes a month at the auctions. It is paying anywhere from Rs 40-50 a kg for the dust grades which suit its purpose. It is required to blend the teas with Assam teas, packet them and supply to the Government's civil supplies at Rs 75 a kg. These teas are sold at fair price shops for Rs 90 a kg. The contention is that between its purchase price and supply price of Rs 75, the Indcoserve is making a profit of not less than Rs 2 a kg.
Given the fact that the Indcoserve' s primary objective is not to make profits but to help growers get a better return even as the consumers pay a lower price than the brands available in the market, more than the volume of profits, the point that merits recognition is that at the current level, the Indcoserve can make profits. If so, what prevents other buyers from paying more to the growers since all other brands are sold for more than Rs 100 a kg seems to be an answered question.
Again, if the Indcoserve is supplying its teas for Rs 75, is there is a real need for the Government to price the packets Rs 15 more than this cost level? Can the Government make the Indcoserve pay still more to the growers through high bids at the auctions.
With so much teas remaining unsold, the traders are aware that there is no need for panic buying. With good rains in the last couple of weeks, the harvest is bound to rise in the coming weeks. So, the market is heading for a glut-induced crash unless steps are taken to sell the teas. And, when teas are not sold, the factories will not have money to pay the growers for the green leaves they bought from them. This means, the stretching limit for the withdrawal game is the withstanding capacity of the growers who have to forego their earnings at a time they complain that the present payment itself is inadequate.
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