Boring tea is beautiful now

Global bottled tea and coffee market is expected to grow at a compounded annual rate of over 10%. A report published by MarketsandMarkets, a research and consulting firm, predicts that global ready-to-drink tea and coffee industry will be worth $125 billion in five years. The global market for hot beverages (coffee and tea) is forecast to reach US$69.77 billion in value and 10.57 million tons in volume terms by the year 2015. Asia-Pacific is expected to remain the largest market, although North America should experience solid growth on the back of increasing health awareness among shoppers. Rising levels of income, fast and busy lifestyles, for health reasons, consumer awareness and greater per capita consumption particularly in developing economies should accelerate future growth momentum and demand for tea further. Numerous health benefits have been attributed to tea since time immemorial. In folk medicine, the health benefits of tea were already recognized 5000 years ago and it was used as a treatment for infectious diseases, colds, and also as an aid to the digestive and nervous systems.Medical studies indicates that tea lowers the risk of coronary artery disease, heart attack and some cancers. It is a completely natural product, without any added flavourings, colours or preservatives. Tea serves as a crucial component for maintaining the balance of body liquids. Tea is becoming popular due to widespread awareness of heath benefits associated with it. Currently we are having bull market for tea globally due to short supply and strong demand for tea. The shortfall in production in Kenya, Sri Lanka and India at present exceeds 43 m kgs compared to the previous year, according to J Thomas & Company Private Ltd, the worlds largest tea auctioneers. The adverse weather conditions across the globe especially in India, Sri-Lanka and Kenya have affected the supply of tea in the world market. Really erratic weather has affected production in Asia and Africa. Tea prices have gone up almost all tea producing countries both in Asia and Africa. Further price strengthening in tea can be seen in the combining months and quarters as results of production drop in Assam region in India, the second largest tea producers in the world. In September, some districts lost 30-35 per cent, compared with the year before due to the very unpredictable weather in Assam. The first 10 days of October seem to be following the same pattern. As of today, its the worst ever hit for Assam according to Interview with Managing director, McLeod Russel India. There will be huge shortage as India enters the winter months. This year, they are likely to see a shortfall of 25 million kg. The supply of quality Assam teas for the rest of the year will be limited as the production season gradually draws to a close due to cold weather In North India. Factories close down by end of December, and resume operations only towards end March. In Kenya the 2011 the output was 377 million while in 2012 it was expected to fall to 360 million kilograms, due to lower production in the first half of the year. During first six months of this year; in India tea production was down 24.16 percent, in Kenya, 21.21 percent, Uganda 8.86 percent and in Sri Lanka was down 6.39 percent. Still we dont find developed commodity market for tea. The only way to play the tea market is buying stocks in well managed tea plantations companies globally after doing home work. In short continuing shortfall in production, increased demand and low stocks at buyers destinations all indicate that tea prices are clearly poised for a further strengthening. Experts predict that this rise in tea prices may continue, as production shortfalls squeeze the market and demand rises quickly in India and China. Finally Tea Should score over coffee in the long run in volume terms, on account of factors such as economical pricing, new flavors and healthy brand value, as new tea drinkers join the brigade.

Tea Export and Transportation: Global Trends

BY RANDY ALTMAN Transporting tea is more dangerous than consumers realize. Challenges include pirates and gangs of highway robbers. Yet, advancement is in the wind, with global positioning satellites (GPS) on ships and trucks, plus expansion of WTO and labeling requirements. Transport remains a costly worry to tea industry leaders. Planning is difficult, and most nations have no reliable data on tea export tonnage. The industry faces stress, although long-term progress looks likely. The tea trade is gradually orienting export to the value-added sector. Hasitha de Alwis, Sri Lanka Tea Board director, reports, an increase of over 13,000 tons compared with last year on packet exports. Listed price for this export increased by almost one-third over last year. The teabag export format also increased, by nearly 8% in weight, and almost one-third in listed price. Export statistics do not reveal a complete analysis of tea type sold internationally to consumers. A wide trend is more average tea retailing in attractive, branded packaging. Such tea can be exported in bulk for budget transportation, but then repackaged for point-of-purchase branding. A different market is the re-export trade, which is often premium tea. This extra transportation step is generally hidden from consumers (and complicates quantitative analysis, as the same tea has been exported at least twice).

Re-export is great news for shipping business, but an extra cost to tea companies. Laws pertaining to reexport are contradictory and frequently ignored. Paradoxically, tea that is properly exported may run afoul of laws at point-of-purchase, or even earlier, at customs. A good example of a careful company involved in diverse re-export is Twinings. Twinings sold in North America ships from the U.K., which does not grow any tea. Twinings re-export method is bifurcated, with tea retailing in tins shipped pre-packaged (tea already in the tins), and tea retailing in cardboard boxes shipped as bulk (not yet packaged for sale). Thus, Twinings headed for North America is transported in two formats to the same North Carolina hub. The Greensboro factory blends and fills for teabags, and then packages in cardboard boxes. While most tins are manufactured in Asia (with low labor costs), Twinings tins are U.K.-made. Tea tin reexportation, in general, is horribly complicated. Tin mis-labeling occurs in three ways: wrong location of tin manufacture, wrong filling location, and wrong location-of-origin of the contents (the tea itself). Twinings tins are the most advanced that I know of in terms of labeling regulatory adherence. Incentives are legalistic and economy-of-scale. Wondrously, a single Twinings tin displays 11 languages. Thus, one manufacturin g run can maximize quantity advantage, with each tin suitable for shipping around the world, pre-made for retail sale in dozens of nations. Such packaging modernity is increasingly necessary, because export globalization places intense pressure on economy-of-scale factors. Twinings utilizes the bottom of the tin for additional nation-specific regulations, arranged nicely in alphabetical order, from Argentina to United Arab Emirates. Twinings provides a valuable service to the whole tea trade by conveying educational information to the consumer. The English Breakfast tin reads on the front, back and side, a blend of Ceylon and Indian teas. The word blend carries regulatory meaning often misunderstood by executives. Laws differentiate between blending and packing. This labeling differentiation is regularly violated by tea companies, especially cheaper businesses. The English Breakfast tin, in a good-faith covering of the regulatory bases, reads on the front Blended and packed from imported teas by R. Twining and Company Limited, London, England and on the bottom, Product of UK. Too often, labels list only the nation to which the tea was transported for blending, implying the nation-ofblending is the source of the tea. This can be legal. Companies take advantage of this loophole, stating or implying, with narrow technical accuracy, an importation source, but without a single statement listing the producing nation. This keeps the consuming public ignorant of tea sources. If the nation-of-blending is more prestigious than nation-of-origin, a company has an incentive to ignore the producer. In potential violation of law, some tea is not even blended, but merely packed straight from bulk shipment, with the packing in a nation separate from that of origin, and no mention of source. Mere re-packing, without blending and without mentioning single-nation origin, brushes against U.S. law, and seems unethical to me. Import/export confusion abounds. Taylors of Harrogate ships Afternoon Darjeeling to the U.S. in an attractive cardboard box, using black print on white background, with gold border around floral design. The 50-teabag box reads, We select fine teas from the highest tea gardens in the foothills of the Himalayas, and under the heading Ingredients, states Darjeeling tea. Also printed on the box is Packed in England. However, the same boxs hygienic over -wrap reads in full regarding source, Tea, produce of more than one country. The Darjeeling Planters Association is particularly sensitive to such confusion over origin, and recently made Trademark history with a TMing of Darjeeling. But, re -export still perpetuates a blurry definition of tea terms, including Darjeeling. A further complexity occurs when a company ships out of multiple ports from one nation-of-origin, a tactic generally restricted to the largest tea businesses, such as Tata Tea Ltd, part of the Tata Sons globally prestigious empire based in India. The patriarch, the worlds leading Zoroastrian businessman, is Ratan N

Tata. The Tata tea business is run by Homi R Khusrokhan, managing director, and Percy T Siganporia, deputy managing director. Tata Tea refers to itself as the worlds largest integrated tea operation. Under Siganporias authority, subordinate executives were authorized for the first time to collect and release certain export data. One single shipment was 2,000 metric tons, large enough to dwarf many tea companies total annual output. This shipment was to Iraq under the United Nations aid program known as Food for Oil. For the U.S., Tata has shipped up to 123 container-loads of instant tea in a single year. The Tata system possesses an admirable reputation earned over generations: well-managed, concerned with ethics, and highly focused on quality control. The headquarters office is in Calcutta, the northeast export hub where the Kolkata Port Trust runs the world-class docks there and in nearby Haldia, comprising Indias only super-port. The federal government has oversight for Kolkata ports, under the Ministry of Shipping and Transportation. The tea exporters trade group is Calcutta Tea Traders Association, the CTTA, not to be confused with another nations CTTA, the Colombo Tea Traders Association (nor with Colombos acronymic TEA, Tea Exporters Association). The Colombo Port goes by the call letters, CMB. The entire island nation relies on this one port, and virtually all Sri Lankan tea is exported. A trend here is stronger security, utilizing Sri Lankas Navy. The Navy budget is relatively high because of a rebel flotilla, the Sea Tigers. The Western world too often ignores the existence of this rarest form of separatist-extremist organization, a sea force. Sri Lankas Navy now purchases fast -attack vessels from Israel, a shipping transaction delayed by ethno-religious factions. Sri Lanka did not previously recognize the existence of Israel, but now maintains diplomatic ties. The islands main ethno religious minority is Hindu, brought from India long ago to work the tea fields. Muslims are a smaller minority, but with political clout as a Parliament coalition partner. Sri Lanka is majority Theravadic Buddhist. In this nations case, the tea trade is not a mere passive bystander in the new global ethno religious conflict, rather a geopolitical player whose international role is underpublicized in the Western press. New corporate structures are emerging out of Sri Lanka to handle export. As of the beginning of this year, John Keells Holdings, the largest capitalized company on the Colombo stock exchange, removes from dormancy Gordon Frazier Ltd, a company acquired with the buyout of Whittalls. Gordon Frazier becomes the vehicle for tea export, and will co-exist under the JKH umbrella with tea brokerages and joint ventures in plantation management. To prevent appearance of violation of self-dealing laws, two directors resigned from the holding company. The new amalgamation moves beyond Asian-style intertwined corporate structure, and the importance of this unique export entity is demonstrated by the selection of Michael De Zoysa as managing director. De Zoysa has over 30 years tea experience, including several top directorships with Unilever Ceylon Ltd. This newborn export enterprise brings De Zoysa back into the tea trade, which he left to head a telecommunications company. The challenge to transparency regulations is uncommon for the tea industry, not typical of Asian enterprise, because brokering tea must appear at arms length from profit making caused by managing or exporting the product. And, John Keells Ltd brokerage recently became Ceylons leading broker. The complexity is vast, involving almost 30 separate companies. Entering the era of export globalization, historically socialist nations are moving toward impartially pro-business government oversight and accounting-firm independence. De Zoysa will likely oversee an eventually highly profitable business, able to strategize faster and longer-term than much of the competition.

A new generation of governmental leadership is forming, with recent elections in Sri Lanka and fresh appointments from India. For the first time, India posts a Tea Board Branch Director, K. Sanjay Kumar, IAS, who combines expertise in multiple indigenous language, politico-military affairs (as a former Magistrate) and tea (as former managing director of Assam Tea Co). The Sri Lankan elections are also important progress. Colombo may now permanently shake off one transport obstacle, the insurance war premium levied on ships docked in corporate-designated war zones. This insurance fee is a wasteful payment to wealthy nations for the right to export tea to them. In New York and New Jersey, The Port Authority is surviving, although its base in the World Trade Center is depressingly destroyed. Some staff bravely relocated to the port at Elizabeth, New Jersey, but countless records are lost forever. At New Orleans, a port long known as a coffee hub, tea imports are quietly gaining marketshare. Before my phone call, New Orleans had not specifically analyzed tea imports, and their first best estimate was several orders of magnitude lower than the final calculation. From January to September of 2001, the most recent period available, New Orleans was port of entry to a surprisingly hefty 8,280 tons of tea. This upward trend has several components. The largest component is low-cost tea from Argentina. This type of tea transport, totally within the Western Hemisphere, is also gaining from Brazil. New Orleans slogan is Americas Most Intermodal Port. A second type of tea arriving at New Orleans is trans-Atlantic, from Germany, Netherlands and the U.K. Such re-export is generally superior quality. James Finlay & Co (US) Inc. took the U.K. shipment. A third type of tea import, a new development for Port of New Orleans, is the container-size shipment. A pioneering container-load of tea from South Africa was taken by Universal Commodities of Bronxville, New York. The largest transported size is the 40-foot container. Within the container, the largest individual packing size is now one metric ton, via the trademarked Super Sack. Super Sacks are expensive, but uniquely spouted, seamed, looped, flexible and re-usable. Complexities still occur in transportation at the seemingly simplest domestic levels, such as truck-driving, with hazards and expense hidden from the public. In India, tea truckers in Assam are held up at gunpoint, perhaps several times in one trip. This extortion is worsening. Many of the extortionary groups are separatist-extremist organizations, supported indirectly by Pakistan and by corrupt Assam officials who receive kickbacks. These militant separatists operate in Assam, but encamp across the border in Bhutan, where the Indian army historically does not tread. These extremists cost the tea companies dearly, and last year kidnapped a tea managers seven-year-old daughter. With the new global War on Terrorism, such activities, gradually, will undergo elimination. The future of tea export requires proactive, creative thinking, with long-term, objective balance and strong-willed strategizing. This scenario necessitates a nurturing, formal establishment, one with government connections, but relatively independent, pro-business and aware of the reality of export globalization. Such a future-oriented establishment has finally come into existence. The Indian Institute of Plantation Management (IIPM) is now, after a long wait, operating as master of its own campus. The IIPM merits this permanent self-standing existence, under the guidance of Dr. Subhash Sharma, author of numerous internationally distinguished business books. IIPM goals include improvement in product quality and increased branding. Competitive advantage is todays rule, in the harshly profitable world of export globaliz ation. The trend toward value-added product will continue, whether shipped directly from nation-of-origin or re-exported. Transportation does expose the industry to extremists organized violence, but here, too, progress is newly possible. The recent elections in Sri Lanka yield pro-business outcomes, including probable negotiations with the LTTE militants, which should allow socioeconomic progress in a nation dependent on tea export. Progress, whether waged from the War Room or the Boardroom, is not inevitable, but

looks likely. Tea remains the worlds highest-consumption purchased drink, relied upon by billions of people for hydration and cultural tradition, and by tens of millions of people for employment. With proper leadership in the nascent convergence of political, military, social and economic sectors, gross revenue will rise and more tea than ever will be shipped

Resources

Organizations
International Coffee Organization 22 Berners Street London W1T 3DD Tel: (44) (0) 20 7580 8591 / 7612 0613 Fax: (44) (0) 20 7580 6129 E-mail: positivelycoffee@ico.org Web Site: www.ico.org The International Coffee Organization is comprised of almost every coffee consuming and producing nation. Its intent is to promote coffee consumption as it has a full schedule of programs designed to increase consumption as well as aid the coffee producer. National Coffee Association of USA, Inc. 15 Maiden Lane, Suite 1405 New York, NY 10038 Tel.: (212) 766-4007 Fax: (212) 766-5815 E-mail: info@ncausa.org Web Site: www.ncausa.org NCA is the only coffee trade association serving all segments of the US coffee industry, from specialty to traditional companies. Its membership includes growers, exporters, importers and roasters, retailers, wholesaler/distributors and allied industry businesses. NCA provides members with national and international government affairs representation, market research, scientific research, educational resources, and public relations. Please feel free to browse NCA's informative Web sites at: www.ncausa.org, and at www.coffeescience.org. National Association for the Specialty Food Trade 120 Wall Street, 27th floor New York, NY 10005 Tel: (212) 482-6440 Fax: (212) 482-6459 Web Sites: www.specialtyfood.com www.nasft.org www.fancyfoodshows.com

www.specialtyfoodmagazine.com www.specialtyfoodmarket.com The National Association for the Specialty Food Trade holds three food shows in the U.S. and publishes a newsletter for the specialty food industry. Specialty Coffee Association of America 330 Golden Shore Suite 50 Long Beach, CA 90802 Tel: (562) 624-4100 Fax: (562) 624-4101 Email: coffee@scaa.org Web Site: www.scaa.org The Specialty Coffee Association of America is an organization aimed at helping the coffee retailers. Its membership, comprised of coffee growers, manufacturers, traders and ancillary equipment manufacturers and retailers, is considered to be the largest in the world. They hold an annual exhibition/conference and many educational seminars throughout the year. Its intent is to educate the retailer on coffee and serving the best possible cup. Tea Association of the USA Tea Council of the USA Specialty Tea Institute (STI) 420 Lexington Avenue New York, NY 10170 Tel: (212) 986-9415 Fax: (212) 697-8658 E-mail: info@teausa.com Web Site: www.teausa.com All three organizations are housed and staffed at the New York office. The Tea Association of the USA serves the tea industry members and holds an annual convention, The Tea Council promotes tea consumption in the U.S. The Specialty Tea Registry avails tea information and assistance to retailers. The Tea Council Ltd. 9, The Courtyard Gowan Avenue Fulham, London SW6 6RH Tel: 020 7371 7787 E-mail: tea@teacouncil.co.uk Web Site: www.tea.co.uk The U.K. Tea Council is comprised of Britain's tea industry and is responsible for the promotion of tea. Its many projects keep tea consistently in the media. European Coffee Federation Tourniairestraat 3 P.O. Box 90445 1006 BK Amsterdam The Netherlands Tel: (31) (20) 511 38 15 Fax: (31) (20) 511 38 92 E-mail: ecf@coffee-associations.org Web Site: www.ecf-coffee.org The European Coffee Federation is the umbrella-organization representing the European soluble coffee manufacturing industry (AFCASOLE), the green coffee trade (CECA) and the coffee roasting industry (EUCA).

After staying hot in 2012, shares of tea and coffee companies are not expected to do well in 2013. Experts point at rising input costs and unfavourable weather in countries that are big producers of these two commodities. The stock of CCL Products, which returned over 175% in 2012, has fallen over 32% to Rs 259 this year till March 28. B&A Ltd, Bombay Burmah Trading Corporation and Tata Global Beverages returned over 75% in 2012. On March 28, they were 33%, 11% and 20% lower, respectively, than the December 31 levels. Bombay Stock Exchange Midcap and Smallcap indices fell 13.6% and 21%, respectively, during the period. Most tea and coffee stocks belong to midcap and smallcap categories. "Some profit-booking and correction was expected. That has coincided with the negative market sentiment since the start of the year. It will be a year of slow and steady returns," says Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities. Alex Mathews, head of research, Geojit BNP Paribas Financial Services, says rising wages, shortage of workers and higher fuel & fertiliser prices may hit the sector in 2013.

CURRENT SCENARIO The average price of tea rose 17% to Rs 121.81 a kg in 2012 from Rs 104 per kg in 2011. The country produced 1,059 million kg tea between April 2012 and January 2013 as against 1,040 million kg in the year-ago period. "We expect production to remain flat this financial year, which could lead to a 5-10% increase in prices. We believe this will expand margins of tea growers," says Sanjay Manyal, research analyst, ICICI Securities.

Coffee production rose to 3,15,500 million tonnes (mt) in 2012-13 from 2,89,600 mt in 2009-10. "The postmonsoon crop estimate for 2012-13 is 3,15,500 mt. Since harvesting is still on, the final estimate will be available by May," says a commerce ministry press release. India's coffee consumption is increasing at 6% a year. According to the government, the country's consumption in 2009-10, 2010-11 and 2011-12 was 1,02,000 mt, 1,08,000 mt and 1,15,000 mt, respectively. About 75% coffee produced in India is exported, which is why returns depend to a large extent on global price trends. Coffee prices rose for five straight years till 2011 but have been falling in 2012, especially of the Arabica variety. In the international market, the price of Arabica coffee has fallen 25% to 163.46 cents per pound in the 12 months to March 2013.

FACTORS TO WATCH Tea and coffee prices are decided by output and inventory levels, the former depending upon rain in east and northeast India, mainly West Bengal and Assam. Before investing, one must also look at fundamentals of the company, the track record of the management and debt levels. Runjhun Jain and Kavita Vempalli, analysts, Nirmal Bang Securities, say, "Investors should look at production in big exporters such as Kenya, Sri Lanka and China, plus weather-related factors such as droughts and floods." INVESTMENT OPTIONS

A total of 25 stocks from the tea sector and two from the coffee sector trade on the Bombay Stock Exchange. The biggest ones, on the basis of market capitalisation, are Tata Global Beverages, Mcleod Russel India and Tata Coffee. Experts say out of these 27 stocks, Mcleod Russel India, Tata Global Beverages and CCL Products can give positive returns in 2013. Mcleod Russel India: The world's largest tea maker produces nearly 100 million kg tea a year from its estates in Assam, West Bengal, Vietnam, Uganda and Rwanda. In the year to April 3, the stock rose 23% to Rs 340.30. On 31 March 2012, the company's consolidated gross debt stood at Rs 263 crore as compared to Rs 316 crore on 31 March 2011. Figures for 2012-13 were not available at the time of writing the article. "One can invest in Mcleod Russel. With tea production expected to remain flat or post slow growth, we have modelled a 5-6% rise in realisations in our 2013-14 earnings estimate. The company has a strong balance sheet. This helps it increase capacity by acquiring tea gardens abroad and in India," says Manyal of ICICI Securities. "One can buy McLeod Russell India on declines in a phased manner for the medium term," says Mathews of Geojit BNP Paribas Financial Services. For the current year, the company has already sold 95% inventory. It expects prices to be higher by Rs 15-20 in March. It also expects to increase production by five-six million kg. Thus, with higher recovery of crop and increase in the proportion of bought leaves, the company intends to increase its total tea production by 10 million kg. At Rs 343, the stock is trading at a price to earnings, or P/E, ratio of 9.7 times 2013-14 estimated earnings per share of Rs 35.2. "We advise investors to hold the stock with a target price of Rs 387, a 12.8% upside from the current levels," says Vikram Dhawan, director, Equentis Capital. Tata Global Beverages: The company gets 65% revenue from overseas operations and is one of the biggest tea players in the markets where it operates.
6 per cent is the annual increase in India's coffee consumption, according to a government survey

According to a report by Equentis Capital issued in March, acquisitions and strategic tie-ups with global beverage giants like PepsiCo and Starbucks offer a huge potential for Tata Global Beverages. These, it says, will help it develop and market

products in local as well as global markets. In the quarter ended December 2012, the company posted a net profit of Rs 92.96 crore, up 14.05% from Rs 81.51 crore in the year-ago quarter. "At the current market price of Rs 128 (on April 5), the stock is trading at a P/E ratio of 16.4 times expected 2013-14 earnings per share of Rs 7.8. We have a 'buy' call on the stock with a target of Rs 175, which gives an upside potential of 30.6%," says Dhawan of Equentis Capital. The stock has risen 10% in the last one year and was at Rs 130 on April 3. CCL Products: CCL makes soluble instant spray dried coffee powder, spray dried agglomerated or granulated coffee, freeze dried coffee as well as freeze concentrated liquid coffee. The company posted consolidated revenue of Rs 207 crore in the quarter ended December 2012 as its Vietnam plant went on stream. This was 51% higher on a year-on-year basis and 64% on a quarter-onquarter basis. The Vietnam plant has a capacity of 10,000 mt per annum. The company plans to add another 5,000 mt in 2013-14. In the one year till April 3, the stock has risen 80% to Rs 272. Experts are bullish for 2013 as well. Jain and Vempalli of Nirmal Bang Securities say, "The stock can touch Rs 400 in the next few quarters. We believe that the company can register 34.8%, 20.3% and 8.4% growth in net sales, Ebitda margin and net profit, respectively, in 2013-14." Ebitda, also called operating profit, stands for earnings before interest, tax, depreciation and amortisation.

Farmers hopes dashed as world tea and coffee prices tumble

At the same time, latest data from the International Coffee Organisation (ICO) shows that reduced prices internationally have pushed the ICO composite indicator which tracks the prices of coffee down by 7.4 per cent, the lowest level since September 2009. Coffee and tea regulators in the region also say poor weather conditions could significantly change the fortunes of the agriculture sector that employs more than 60 per cent of the regions workforce. The organisation said that given current price trends, there is a diminishing incentive for farmers to invest in their crops, and the use of inputs such as fertilisers and labour will likely be reduced.

Coffee and tea farmers in East Africa will see a sharp reduction in earnings in the remaining months of this year, following a drop in world prices of the two commodities and the continued political turmoil in Egypt, one of the top buyers of the region s tea.

At the same time, latest data from the International Coffee Organisation (ICO) shows that reduced prices internationally have pushed the ICO composite indicator which tracks the prices of coffee down by 7.4 per cent, the lowest level since September 2009.

Tea and coffee exports make up the bulk of foreign currency inflows to the governments of Kenya, Uganda, Rwanda, Tanzania and Burundi.

Kenyas Central Bank (CBK) warned on Tuesday that the unrest in Egypt and the Syrian conflict which is threatening to draw in the larger Middle East as well as the Eurozone crisis, posed a threat to agriculture exports from the region.

Negative incentive Coffee and tea regulators in the region also say poor weather conditions could significantly change the fortunes of the agriculture sector that employs more than 60 per cent of the regions workforce.

READ: Poor rainfall in Kenya to affect earnings from agricultural sector Kenyas coffee prices fell to a low of $2.73 per kilogramme in May from $3.96 per kilogramme in January, and the ICO said that commodity prices in general have been on a downward trend mostly due to negative economic news from China and the US.

The organisation said that given current price trends, there is a diminishing incentive for farmers to invest in their crops, and the use of inputs such as fertilisers and labour will likely be reduced.

This could potentially have a negative impact on production volumes and quality over the next couple of years, resulting in increased price volatility and a less sustainable agricultural value chain, said the ICO.

Rwanda earned $69.5 million from coffee in the year ended June 2013, against the target of $74 million, while tea earnings were $63 million against the projected $69 million, reflecting the fluctuating prices internationally.

Coffee, tea farmers hit by fall in prices to seven-year low

Millions of coffee and tea farmers are set to be hit after prices of the two commodities dropped to a seven-year low even as input costs surged The East Africa Tea Trade Association (EATTA) on Monday raised the alarm saying the livelihoods of up to two million farmers in the region are at risk as prices at the Mombasa auction have fallen below the production costs Tea prices have plummeted to lows last seen in 2008 according to EATTA, while coffee prices have plunged to levels last recorded in 2007, according to the International Coffee Organisation (ICO)

Millions of coffee and tea farmers are set to be hit after prices of the two commodities dropped to a seven-year low even as input costs surged following the recent scrapping of value added tax remissions.

The East Africa Tea Trade Association (EATTA) on Monday raised the alarm saying the livelihoods of up to two million farmers in the region are at risk as prices at the Mombasa auction have fallen below the production costs.

Tea prices have plummeted to lows last seen in 2008 according to EATTA, while coffee prices have plunged to levels last recorded in 2007, according to the International Coffee Organisation (ICO).

There can be no doubt that in many countries the prices received by coffee growers fail to cover the unit costs of production, while at the same time the prices of basic goods, such as food and energy, are rising. Indeed, coffee is the worst performing agricultural commodity of the last two years, with a downward trend that has so far shown no sign of improving, said ICO in its report covering up to November.

Coffee prices averaged 107.03 US cents per half a kilogramme in October as per the ICO composite indicator price, a 4.3 per cent decrease on September levels and its lowest level since March 2009.

The drop in coffee prices has been attributed to increased global supplies. The price at which we sell our commodity at is dictated by international prices, said Mr Daniel Mbithi, chief executive officer of the Nairobi Coffee Exchange (NCE).

The ICO report came as Lerionka Tiampati, the EATTA chairman and MD of the Kenya Tea Development Authority (KTDA), issued a statement appealing to the government to reduce taxes in the tea industry to save farmers from further losses.

The whole industry is facing serious cash flow problems as teas are selling below their cost of production, said Mr Tiampati who estimated that more than two million people directly earn their livelihoods from tea growing, while 10 million benefit indirectly from the sector.

EATTA runs the Mombasa Tea Auction , which is the largest black tea auction centre in the world. Tea farmers received a record bonus of Sh69 billion this year helped by a higher output, but this growth in production volume is also dealing the industry a blow as it has depressed international auction prices.

Edward Mudibo, managing director of EATTA said yesterday the group has engaged the government on several occasions over the high cost of production and on levies that are charged on tea but so far they are yet to get any feedback.

The cost of tea production in the country is high compared to other regional countries and when the world price falls, we are hit the most because our tea becomes uncompetitive at the market, said Mr Mudibo.

Just like coffee, 95 per cent of the locally made tea is exported while the remaining five per cent is consumed in the country.

Mr Mudibo said that tea should be put under the category of food as opposed to beverage, where it has been classified currently, a move that will exempt the commodity from the 16 percent VAT levy.

Declining tea and coffee export prices set off alarm bells
Tea and coffee prices have been declining in the last few years, hitting a new low and setting off warning bells over the future of the two commodities that are the livelihood of about 3 million Kenyans. Experts say the trend is likely to continue into this year if conditions on the international market remain the same, or even worsen. The prices of the two commodities are susceptible to price volatility in the international market. Production levels of the two crops in other countries, the strength of the shilling, and political crises in target markets are expected to influence price movements. Tea prices dropped by a massive 38.6 per cent between January and October last year, triggering a call by stakeholders for government intervention through a review of levies to cushion farmers earnings. The prices were the lowest in eight years. But sector experts say the prices have begun to stabilise, sparking hope in farmers that there might not be any further drop. The prices have started stabilising at the Mombasa tea auction. We expect that they have already hit their lowest level and anticipate no further decline, said Mr Peter Kamanga. East African Tea Traders Association (EATTA), which manages the Mombasa Tea Auction, had projected about Sh3 billion on lower export volumes based on a traditional trend in past few years where earnings have been rising. But the prices declined rapidly on account of increased production from countries in the region and volumes in the international market. Farmers earnings last year reached Sh69 billion from Sh61 billion in 2011, but the price per kilo declined by 10 per cent due to what the Kenya Tea Development Agency described as a depressed global market for the Black CTC teas for which Kenya is known.

This was driven by high volumes and volatile market dynamics, KTDA managing director Lerionka Tiampati said in September 2013. Green tea delivered to factories in the past year stood at 1.1 billion kilos, compared to 907 million kilogrammes over the same period in 2012. The exchange rates, though stable at a mean rate of about Sh85 (compared with a mean of Sh89 in 2012) to the dollar, also impacted negatively on the total revenues earned. A weak shilling is always a boon to farmers earnings. The political crisis in Egypt that saw the overthrow of President Mohamed Morsy, and the subsequent uncertainty led to a decline in Kenyas exports to the country. Egypt is among the top three key destinations for Kenya tea exports. The situation was made worse by the recent political crisis in South Sudan, which is among the fastest-rising destinations for tea exports. Coffee prices have also experienced a steady drop, recording the lowest prices in the last six years and threatening to stifle growth in the sector that has only recently recovered from the 1990s slump. The quantity of coffee auctioned at the Nairobi Coffee Exchange dropped by 38 per cent to 2,442.26 metric tonnes in September 2013 from 3,938 metric tonnes in January. The average price also fell by 16.8 per cent to Sh286.46 per kilogramme compared to Sh344.3 in the same period. OVERSUPPLY Oversupply in the last 10 months depressed international prices, resulting in lower farmers earnings. Earnings for last year are projected to fall below Sh17 billion, down from Sh19 billion earned in 2012, and a further drop from the Sh22 billion earned in 2011. According to the International Coffee Organisation (ICO), prices hit a six-and-half-year low in November last year, with the composite index averaging 100.99 US cents per pound 5.6 per cent lower than that recorded in October. Experts say market conditions point to a market struggling to gain stability as production outstrips consumption. Countries like Brazil have responded by debt waivers, while Colombia has announced it will continue to provide subsidies to its farmers. In Vietnam there have been calls for government funds to stock coffee beans to support domestic prices. Pricing of coffee at the international market is subject to many factors. However, there are indications that they are likely to stabilise this year, said Mr Kennedy Gitonga, head of agri-business at the Coffee Research Foundation. Exports in October amounted to 8.5 million bags, 9.6 per cent lower than October 2012.

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