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Production in current tea season likely to be substantially lower; while costs would increase, the outlook on prices remains uncertain: ICRA

The Ministry of Home Affairs, Government of India, through its latest clarification provided on April 3, 2020, has exempted the tea industry from the lockdown, with the condition that only 50% of the workers can be involved in estate activities at a point in time. The state governments and district magistrates are now required to pass similar orders and come up with adequate guidelines before tea estates can restart operations.

Till such time as the estates re-open, apart from the already impacted production, uncontrolled growth of tea bushes, coupled with proliferation of weeds, would render the estates unsuitable for immediate production. Also, these estates may have to deal with infestation of pests with garden maintenance activities almost non-existent during lockdown period. Substantial efforts would therefore be necessary to bring the bushes back to a state conducive for growing and plucking. ICRA estimates that the earliest the tea estates could start production would be around the third week of April, given the present situation. Additionally, productivity levels are likely to be reduced drastically, since only 50% of the workers would be allowed in the gardens. 

Commenting on the same, Mr. Kaushik Das, Vice President and Sector Head, Corporate Sector Ratings, ICRA, said, “As per our estimates, ~6-7% of the annual production, primarily of the first flush variety, of North India (NI) based organised players and another ~5-6% from South India (SI) are likely to get impacted in CY2020. Consequently, production from the organised segment is estimated to decline by ~45-50 mn kgs. A similar impact on the small tea growers’ segment would result in a further estimated decline of ~ 45 mn kgs.”

Tea is a fixed cost intensive industry with the cost of labour accounting for ~65% to 70% of the total cost of production. Tea estates employ a mix of permanent and temporary workers, with most of the temporary workers employed in the plucking of green leaves. ICRA expects tea estates to substantially reduce the number of temporary workers during the period of low production. Nonetheless, the impact of a reduction in production, because of fixed costs and loss in contribution, is estimated to increase the cost by nearly ~Rs 15 per kg on the balance production during the rest of the year, assuming that normal production returns by the time second flush teas become available. Any decline in production in the second flush teas would result in a substantially higher cost per kg.

“With the first flush of teas gone, it is imperative that production of the second flush teas in NI is as close to normal as possible. The second flush, production of which typically starts in the second week of May, is usually the best quality for NI players, except Darjeeling, where the first flush is of the most premium quality, fetching some of the highest prices and is critical in determining the overall profitability of the bulk tea players based out of North India. For tea companies already reeling under high costs and stagnant realisations, any material decline in production of the second flush teas would lead to further hardships, unless there is a commensurate increase in the prices,” Mr Das added.

While a 6-7% decline (without considering any impact on the second flush teas) in production would, under a normal demand-and-supply scenario, result in a sizeable increase in prices, however, these are uncertain times. The trend in export as well as domestic demand would be the main factors determining the trend in tea prices. Most of the premium export markets of Indian teas are suffering under the Covid-19 outbreak. Apart from any decline in demand, logistical issues could also have an impact on the volume of exports to those countries. In addition, a substantial carry-over stock in the domestic market from the previous season, estimated to be ~60 mn kgs, would also have a softening impact on any shortages due to the decline in production in the current season. In such a scenario, any increase in the wage rates going forward would be extremely difficult for the tea sector to absorb.

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