Sri Lankan tea market

Tea has been an important exported product for both Sri Lanka and Kenya. The product of both these companies has earned recognition in the global market. Apart from that, significant resources of both these countries are devoted for the production of tea. Despite the similarities the behaviour and the nature of the tea industry of these two countries are different. The respective industries have historically shown different responsiveness towards changing external environment. During the year 2014-15, while the price of tea increased hugely in case of Kenya, the price of tea decreased only by 11% in Sri Lanka (Munasinghe, 2018). The objective of the discussion presented in this essay is to investigate the reason for the difference in the pattern of price changes in these two tea industries.

Tea is the largest exported product of this country and it contributes 2% to the overall GDP. According to the figures of the year 2016, the tea industry of Sri Lanka employs around 1 million labours. It is the main form of livelihood for a significant part of the population. Currently, in terms of volume, Sri Lanka is the fourth largest producer of tea. However, in the year 1995, it used to be the largest tea producer with around 28% of the global production of tea. Hajra and Yang (2015) noted that due to the long stretch of lack of investment in the tea industry of Sri Lanka has resulted in a deterioration of the industry. Countries like Kenya have now surpassed Sri Lanka in terms of tea production.  According to the figure of the year 2013, the overall production of tea was 340 million kg which reduced to 331 million kg the next year.

Tea is an important cash crop for Kenya as well. Tea is the largest traded good for the country that contributes significantly towards the national product. One of the unique points about the tea industry of Kenya is that it produces almost all the kinds of teas. While black tea is the most widely grown tea in the country, other types of tea such as the yellow tea, green tea are also grown upon the orders from the importing nations (Mzembe et al. 2016). Despite the fact that, Kenya has used manual tea plucking process for a long time, it has surpassed major tea producing nations such as Sri Lanka, Turkey and many more. Azapagic et al. (2016) highlighted that recent use of advanced machineries in the tea industry of Kenya is expected to enhance the production even more.  According to the experts in the field of tea production, Kenya has the best climate for the variety of tea production. However, corruption from the side of the government and lack of use of machineries in the industry has curbed the potential of the country for a long time now.

Despite the similarity of having tea as the largest product for foreign trade, these two industries have a lot of differences that influences the responsiveness of the respective industries. One of the biggest differences between the markets is the market structure. While the market structure in the Sri Lankan tea market is more of an oligopoly, the market structure in Kenya is rather a monopolistically competitive. There exist a lot of small sellers in the market of Kenyan tea industry contrary to a small pool of large players in case of Sri Lanka. Wambu et al. (2017) highlighted that market structure has a crucial role to play in the volatility of the pricing. The small number of players with highly sophisticated production technology in Sri Lanka attracts a huge amount of investment throughout the year. According to the figures of the year 2016, 890 Million USD was the total investment inflow into the tea industry of Sri Lanka compared to a mere 217 Million USD in case of Kenya. The financial markets in Sri Lanka are much more stable than that of Kenya and hence price remains more stable. In addition to that, due to the presence of oligopoly, an undisclosed an unofficial cartel exist among the large players of Sri Lanka that helps in the stabilisation of tea prices.

Kenyan tea market

Furthermore, Qu et al. (2017) highlighted that domestic demand for tea in Sri Lanka has also been crucial for the stability of tea prices in the country. During the years 1995, around 71% of the overall produce used to sell in the global market. However, since the year 2001, demand from the domestic consumers started to increase. This steady demand from the domestic market has allowed the firms to have constant prices over the years. This, in turn, has lead to only an 11% decrease during the 2014-2015. Figure 2 also shows the tea exports of the country over the years. It needs to be noted that, in the year 2014, it reached a peak and then the export started to reduce. This is due to the fact that organisations started to realise that, domestic demand is also important given the fact that it has already lost the foothold that it had during the year 1995.

On the other hand, the nature of the tea industry of Kenya is completely different. Huge number of small companies of the market has no control over the prices of tea. Therefore, the domestic demand for the tea in Kenya mainly depends on the demand and the supply. The tea industry of Kenya also attracts foreign investment. With the foreign investment comes expectation of supply and risk that influences the stock prices of the small companies of the tea industry of Kenya. According to the price volatility theory of agricultural goods, price often becomes too responsive to the change in supply and demand unlike the other types of commodities of the market. This further explains the 64% increase in the price of tea in Kenya. Apart from that, domestic demand for tea in Kenya has not been impressive since the inception of tea production in Kenya in the year 1905. Palihakkara and Inoue (2018) stated that labour cost is the reason for the recent upsurge in the price of tea in Kenya. Kenyan tea industry is mainly labour intensive and hence the overall increase in wage rate has contributed to the shocking price increase in case of Kenya.

Price volatility in case of Kenyan tea has also been due to the increased demand for Kenyan tea in the foreign market. The demand for Kenyan tree has increased by 13% since 2013 and production has increased. However, in the short run, Kenyan tea industry, equipped with small-sized companies failed to make use of the economies of scale. Consequently, the price increased by 64% with the increase in the output. However, many of the companies of the market have now invested on the technological advancement of the production process. In addition to that, the expectation of rising demand from the foreign market has further increased the price (Prange, 2016). During 2014-15, the supply of Kenyan tea in the market reduced subject to the speculation that global demand would rise. In this case, the supply curve shifted to left reducing the overall output and increasing the price of tea in Kenya.

Conclusion

Therefore, there are two reasons for the differences in the price fluctuations in two major tea markets of the world. While the first one is the structural one, the second one is the economical. The market structure and the operation of the sellers in both of the market are different that have led to different price stability in the two market. While the price is more stable in Sri Lanka, it has been fluctuating more in Kenya. The presence of cooperation and financial stability in Sri Lanka has reflected on the price of tea. Apart from that, sophisticated production has also made it an attractive destination for investment and hence the price stability or small reduction. The structure of Kenyan industry is more like a monopolistically competitive market with a high number of small sellers. This coupled with the increased demand for the Kenyan tea led to a rise in tea price in Mombasa in the year 2015. Another reason for the difference in the change in price has been explained through the theory of price volatility. This has pointed out that, lack of stability and market expectation reduced the supply of tea in Kenya during 2015 leading to an increase in the price.

References

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Munasinghe, M.A.T.K., 2018. The agency of global sustainability certifications in developing countries: the Rainforest Alliance and the Sri Lankan tea industry (Doctoral dissertation, University of Birmingham).

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Qu, F., Jin, X., Shi, Y. and Chen, Q., 2017. Study on the impact of cultural factors on the industrial competitiveness of oolong tea based on spatial effects. Research on Modern Higher Education, 3(unknown), pp.7-11.

Wambu, E.W., Fu, H.Z. and Ho, Y.S., 2017. Characteristics and trends in global tea research: a Science Citation Index Expanded?based analysis. International journal of food science & technology, 52(3), pp.644-651.