Why drought could be good news for tea prices

published 8 March 2006

After the impressive performances of other soft commodities, it is "party time for tea stocks", says The India Times.

Higher prices are a likely result of the terrible drought that has hit Kenya, the world's biggest tea producer. Lack of rain from October to December the main rainy season has ravaged the tea crop: production fell 50% in January from a year earlier, and the situation could get worse.

The next rains are not due until March, but in some areas "tea plants are so badly scorched that they will die if it does not rain soon", says Xan Rice in The Times. That would be really bad news for the Kenyan tea industry, as a tea plant takes four years to reach maturity. Production for February might be under "20% of our targets", says Arthur Rimberia, general manager of production at the Kenya Tea Development Agency, which processes and markets more than half of the country's tea output.

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But the drought, which has left 3.5 million people in need of emergency food, could be good news for tea prices. The India-based Brij Mohan Khaitan Group, the world's largest bulk tea producer, expects its first flush tea prices to be in the range of 100-115 rupees per kilogram 46% above their 1998/9 peak, says Ishita Ayan Dutt in the Business Standard India. The group sees this year's average price being 95 rupees per kilo up from this week's price of just over 80 rupees.

But even before the rains failed to materialise, it was expecting prices to be about 10% higher, following the pattern of last year, where prices rose throughout the first nine months of the year, before correcting in October.

Annunziata was a deputy editor at MoneyWeek, covering financial markets, politics, economics and comment pieces. She then went on to the Daily Telegraph as a lead writer where she wrote a column on young women’s financial issues. She was briefly a member of the European Parliament for the East Midlands region in the UK as part of the Conservative Party. Annunziata continues to write as a freelance journalist.