Tea and Coffee are two of the most common beverages in the world. They have been regarded as a holy potion. It is has a high medicinal value. In fact, Chinese immigrants to the USA who helped build the First Transcontinental Railroad in the 19th Century survived on Black Tea, which helped stave off dysentery and other waterborne illnesses. Out-of-home consumption itself is 40% of the total consumption of tea.
The cultivation of Coffee started with the sowing of 7 Coffee beans smuggled from Yemen by an Indian Saint. Thereafter, the seeds were sown in the present-day district of Chikkamagaluru. It is estimated that India now consumes 120,000 tons of coffee per year.
Tea and Coffee Key Data.
- The market consumption for Tea is expected to grow at a CAGR of 4% in the forecast period of 2020-2025. It is expected to attain 1.40 million tons of production by 2025.
- As of 2019, India was the second-largest tea producer in the world with production of 1,339.70 million kgs. Furthermore, during Jan-Feb 2020, the estimated production of tea stood at 30.54 million kgs.
- Revenue in the Coffee segment amounts to US$808m in 2020 in India. The market is expected to grow annually by 8.9% (CAGR 2020-2025).
- According to CoffeeBi, The urban consumption dominates with about 73 per cent of total volumes. The remaining 27 per cent it is speculated to account for rural consumption, especially in South India. Moreover, Coffee is consumed more in South India than in North India.
- Among the South Indian States, Tamil Nadu accounts for 60 per cent of consumption, while Karnataka, Andhra Pradesh, and Kerala account for 25%, 10%, and 5% respectively.
- Nearly 30% of Coffee produced in India is Arabica and 70% produced is Robusta.
Tea, Coffee and the Tickers; and of course COVID-19.
Tea and Coffee stocks have shown excellent performance this quarter. According to Trendlyne, 10 out of the 12 Tea and Coffee stocks have shown a positive profit growth this quarter and share prices of Tea and Coffee stocks zoomed substantially. However, Production and Consumption figures speak the opposite, What is the paradox we are looking at? Let’s find out.
- After the COVID-19 pandemic, there was a 40% reduction in production in Tea due to disrupted supply chain and loss of lively hood. Moreover, Assam, which is the highest producer of tea faced devastating floods. The production of the state fell from 44 Million Kilograms (M. Kgs) on April 19′ to just about 14 M.Kgs on April 20′.
- The price of tea skyrocketed from a meagre Rs. 121.34 per Kg in March to Rs. 188.77 per Kg in July, according to Auction Price Data from Tea Board. The average monthly domestic consumption is 90 million kg. Of this, out-of-home consumption accounts for 36 million kg. In April and May, there was a loss of around 72 million kg of tea consumption.
- As tea prices soar in India due to lower output this year, tea players and tea traders are considering importing teas from Kenya and Vietnam, where tea prices have crashed due to overproduction.
- If the government approves, India may have to import tea for the first time. India has been importing teas only for re-export and that too at a small volume of 9-10 million kg annually.
- India’s coffee exporters are amidst deep financial crisis with the state and Central governments announcing a lockdown to contain the spread of Covid-19 across the country. Restriction of coffee exports from India to Europe has had an unprecedented impact on the Indian Coffee Industry.
- As a result, around 21,000 metric tonnes of coffee valued at over Rs 400 crore is stuck at coffee curing centres and various ports for non-availability of permissions to export.
- Likewise, India’s coffee export declined by 17.2% per cent to 168,435 tonnes for the period from January 1 to July 23, 2020, compared with the same period in the previous year. The plunge has been severe in the case of robusta variety beans at 26 per cent.
- Coffee prices have been on the rise due to high demand and low supply, is a trend that is likely to continue.
The Top Gainers in the Tea and Coffee Industry for the month of July 20′ are as follows:
|Top Gainers(July 20′) on NSE|
|Rossell India Ltd.||43.67%|
|Tata Coffee Ltd.||40.41%|
|Goodricke Group Ltd.||36.80%|
|Tata Consumer Products.||33.57%|
Average Revenue Growth of Tea and Coffee companies was 27.74%. EBIT Growth for Tea and Coffee companies was 72.4%. Operating Profit growth for the companies was 68%. All of this over a year. The tea market just luke other companies initially slumped which was followed by a spikey/volatile recovery as the companies started posting excellent results.
How was is it that reduced production still resulted in tea and coffee companies making a profit?
- India is the largest consumer of tea in the world. The production slowed down, but the demand never went down very much. After the lockdown was imposed the demand for out-of-home Tea slumped, but demand for Tea inside households covered up for it to some extent. The demand for Tea overall can never die down in a country like India.
- According to data from the Indian Tea Board, there is a reserve inventory or a buffer stock for at least 145-165 Days when the lock-down was imposed. The Tea picking season had just ended in March when the lockdown was imposed. It is THIS Tea that met with the consumption demand and added to the profits of Tea companies
- Why the panic in the newsroom then? The demand for three months of Tea was met, but the non-availability of labour and resources during the lockdown is what caused panic in the market. There was an uncertainty about when the production of Tea would resume. This made it difficult for companies to plan prospects or orders of Tea causing prices to skyrocket. This was a supply constraint.
- June-July 2020 data from Indian Board show that India’s Tea production has started closing up to pre-COVID levels. It will be clearer through August-September data whether India will be able to supply the consumption and export demand or not.
- On the other hand, Coffee conglomerates like Tata Consumer Products and Tata Coffee managed to perform well because of its international presence with the likes of Eight O’Clock Coffee and Tata Coffee Vietnam Company (TCVCL).
- Medium and small farmers were already having difficulty covering operating costs. The decrease in prices in recent years has made their livelihood increasingly difficult. Therefore, the main risk is the possible shortage of manpower due to the spread of the virus and the measures of lockdown.
What drives Tea and Coffee Prices?
- The concentration of production: Brazil and Vietnam happen to be the top two producers of coffee, This concentrated output means that supply disruptions in one or both of these countries can have a significant impact on the price of coffee.
- Substitution to cheaper beans or leaves: In the Tea and Coffee business, there are cheap beans/leaves and expensive finer beans/leaves. If it so happens that the price spread between the cheap and expensive one’s increases then companies will start substituting the cheaper ones into their blend. This is a positive signal for India in terms of coffee This is because 70% of India’s produce is Robusta.
- The price of substitute products: Tea and Coffee are substitute goods, one should analyse the trend in either side to be able to speculate which good will be more in demand and where? Other substitutes for caffeine include energy drinks and supplements.
- The weather: Coffee in India mostly depends on monsoon and humidity. A poor monsoon or irrigation facility means that coffee production will be hampered. If climatic conditions are unfavourable for tea plantations owing to less or heavy rainfall that also poses severe problems affecting the production of tea and lives of tea industry labourers.
- Yield: There is a fair possibility that the Tea bush or coffee plant might rot or be rendered unsuitable due to conditions like pest, disease or climatic conditions. It is necessary to check the yield provided by Tea and Coffee plantations. The data for which is available on India Tea Board or Indian Coffee Board.
- Supply Chain and Logistics: The customs duties exposed on the import and export of coffee has a huge impact on the price and demand of the coffee. One should look out for trade and policy changes between countries.
What’s the Future Like?
During the period of the lockdown Tea and Coffee, production was impacted. However, June-July numbers of production show some sign of positivity in terms of production as it returns to normalcy. Tea has a huge potential export value as the international market shifts towards a more healthy lifestyle and the adoption of Tea increases as a substitute for widely preferred coffee.
On the other hand, the Chai drinking nation of India sees greater potential in rising demand for premium coffee as people’s disposable incomes rise and so does their taste for good tasting coffee. Moreover, the North Indian Market isn’t as penetrated as the South Indian market in terms of coffee consumption.
Tea and Coffee are two products that stimulate the human mind, so much so that many around the world have made it a part of their daily routine. The possible reason why the Tea and Coffee market in India suffered in COIVD is the disruption of Logistics, Supply Chain and Labor along with the uncertainty of things getting back to normal. Huge potential lies in the future ahead for the two to prosper.