1. Trade and Markets Division 20th Session FAO Intergovernmental Group on Tea – Colombo, Sri Lanka 30 Jan -1 Feb 2012 CURRENT SITUATION AND MEDIUM TERM OUTLOOK CURRENT SITUATION AND MEDIUM TERM OUTLOOK

2. Trade and Markets Division HIGHLIGHTS World black tea prices remained firm in 2010 and 2011 as market fundamentals were strong. After long periods of sustained growth, black tea production actually declined in 2009, and demand for black tea exceeded supply. This trend continued in 2010 and 2011. As the FAO Tea Composite Price is an indicator price for black tea, it followed that prices were firm throughout 2009 to 2011. Early forecast for 2012 indicates a continuation of this trend as adverse weather has been experienced by some major producers. 2

3. Trade and Markets Division WORLD TEA PRODUCTION WORLD TEA PRODUCTION (Thousand tonnes)

4. Trade and Markets Division PRODUCTION Growth in world output was due to major recoveries in the two largest black tea exporting countries: Kenya by 18 percent and Sri Lanka by 13 percent. Other notable increases occurred in Argentina (23.5 percent) and Uganda (16.6 percent). China remained the largest producing country with an output of 1.4 million tonnes, accounting for 33 percent of the world total, while production in India, the 2nd largest producer, continued to decline and reached 0.97 million tonnes in 2010. 4

5. Trade and Markets Division WORLD TEA EXPORTS (Thousand tonnes)

6. Trade and Markets Division WORLD TEA CONSUMPTION (Thousand tonnes)

7. Trade and Markets Division 7 FAO TEA COMPOSITE PRICE FAO TEA COMPOSITE PRICE (USD/Kg)

8. Trade and Markets Division Tea Production and Trade to 2021 8

9. Trade and Markets Division PROJECTED BLACK TEA PRODUCTION (Thousand tonnes) PROJECTED BLACK TEA PRODUCTION (Thousand tonnes) (growth rate 1.87% p.a.)

10. Trade and Markets Division PROJECTED GREEN TEA PRODUCTION PROJECTED GREEN TEA PRODUCTION (Thousand tonnes) (growth rate 7.2% p.a.)

11. Trade and Markets Division PROJECTED BLACK TEA CONSUMPTION (Thousand tonnes) (Growth Rate 1.8 % p.a.)

12. Trade and Markets Division PROJECTED BLACK TEA EXPORTS (Thousand tonnes) (Growth rate: 1.5 % p. a.)

13. Trade and Markets Division PROJECTED GREEN TEA EXPORTS (Thousand tonnes) (Growth rate: 5.8 % p. a.)

14. Trade and Markets Division 14 CONCLUDING REMARKS The review of the world tea market indicates an improvement in the fundamental oversupply situation which has persisted in recent years underpinning current firm prices. The increase in tea prices resulted in an estimated 2.2 percent increase in export earnings in 2011 at the global level, significantly affecting rural incomes and household food security in tea producing countries. In the context of food security, tea export earnings in 2009 account for about 36 percent of total agricultural export receipts in Kenya and 62 percent of agricultural export revenue in Sri Lanka. In addition, export earnings from tea paid for about 61 percent of Kenya’s food import bill, while in Sri Lanka tea exports covered the country’s entire food import bill.

15. Trade and Markets Division CONCLUDING REMARKS The ratio was relatively small for other producing countries, but remained significant. For example, even though domestic consumption accounted for a larger share of total production in Indonesia, export value in 2010 was USD178 million and in Tanzania tea exports earned the country USD 48 million. In the medium term, the projections suggest that supply and demand of black tea will be in equilibrium in 2021, at a price of USD 2.75 per Kg, if there is no supply over- reaction to the current firm prices. 15

16. Trade and Markets Division Baseline Tea Prices (USD/Kg)

17. Trade and Markets Division Concluding Remarks However, if there is an over reaction to recent high prices which, for example, would result in a 5 percent increase in production, the results can be quite different. Here the clearing price would be 17 percent less than the baseline price at USD 2.54 per Kg. If the reaction to the current high prices is even stronger, resulting in a say 10 percent increase in production over the baseline increase, then prices could be 38 percent lower.

18. Trade and Markets Division Scenario run: Large supply response and impact on Tea prices ( 5 percent simulation) (USD/Kg)

19. Trade and Markets Division Scenario run: Large supply response and impact on Tea prices ( 10 percent simulation) (USD/Kg)

20. Trade and Markets Division Concluding Remarks Therefore, caution needs to be exercised. Greater efforts should be directed at expanding demand. For example, there is scope for increasing per capita consumption in producing countries as they are low compared to traditional import markets. The IGG on Tea has encouraged diversification into other segments of the market, such as organic tea.

21. Trade and Markets Division 21 Concluding Remarks The health benefits of tea consumption should be used more extensively in promoting consumption in both producing and importing countries. However, in targeting potential growth markets, recognition of and compliance with food safety and quality standards is essential.

22. Trade and Markets Division 22 Thank you