Price Fluctuations in the Tea Market
Price fluctuations are a common phenomenon in this world, especially in the agricultural sector we have seen various type of food prices fluctuate and one major food crop that is greatly affected by this fluctuation is Tea. Since the year 2014 tea has experienced little price fluctuation compared to other crops such coffee and Cacao. Price fluctuations often happens due to various uncontrollable and controllable factors. One of the factors is governmental policies, which play vital role in determining the global prices tea will fetch from the international markets. Usually prices of tea are greatly determined by actual supply and demand of this product. This tends to play a great role in yearly price fluctuations that we have seen. In addition to this weather, patterns and the global market can greatly determine the price in which a nation will sell its tea. This paper will economically analyse based on the given figure the change of prices between Sri Lanka and Kenya tea over a specific given period, it will answer the questions why has price fluctuations been so different between Sri Lanka and Kenya Tea any yet they produce the same type of tea.
Figure 1. World Bank Commodities Data
As we can see from figure 1 tea prices in Kenya and Sri Lanka have been fluctuating since 2015 but averagely, we not that the price of Sri Lankan tea has risen steadily compared to the tea in Kenya. In 2015 tea in Sri Lanka was going for 2.98$/kg but in October 2018 it fetched a price of 3.25$/kg representing a 0.27 increase this was big contrast when comparing to the price of Kenyan tea which has been reducing gradually from 2015. For example, tea was auctioned in Kenya at 2.96$/kg in 2015 this then has dropped to 2.42%$/kg in October 2018(Anderson, 2016). Although their other times within this period where we saw an increase in Kenyan tea prices but generally globally Kenyan Tea prices has been declining. Many factors greatly play a role in this price fluctuations and some of them have been discussed below.
Change in Climatic Conditions
Weather pattern greatly determine and influence the price tea will fetch locally or internationally, this is greatly linked to the supply and demand of the products. Usually when a nation experiences bad weather characterized by prolonged drought then this negatively affects tea in terms of reducing the production of tea, this goes a long way in affecting the price in which tea prices will fetch. Demand for tea has been strong despite the hard-economic situations nations have been experiencing and we can ideally define demand for tea has more income inelastic (Anderson, 2016). This has really contributed to price that Kenyan tea is fetching. For past three years East Africa has been experiencing drought this has ideally impacted on yields of tea that Kenya produce to keep up with the demand and the high prices tea has been fetching all over the world. Tea prices has been gradually been decreasing. This is unlike Sri Lanka, which has experienced a relatively good weather compared to Kenya. Sri Lanka good weather patterns has made it to increase its production and due the global demand for tea worldwide, their prices have been increasing gradually over the 3-year period.
One of the factors that has been attributed to decrease in tea price in Kenya is that because of the high rainfall that Kenya has experienced in some months this has made productions to be very high and thus due to the high supply of this crop to the auctions the prices of the tea has been declining.
Figure 2 (Tea Exporters Association Sri Lanka, 2017)
In the above table it has shown the price movement of tea prices in year 2015, 2016, 2017 and 2018. One thing to note that for each year the price of Tea has been increasing gradually in Sri Lanka. For example, in the year 2016 Price of tea increase from 400Rs to about 560Rs per KG. The reason for this is that price of tea increased because of the strong global demand and the low supply from the tea producing nations. This was an advantage to farmers in Sri Lanka has they had produced a high yield of tea due to the favourable climatic conditions that they had. High demand of the product greatly made the price of Sri Lankan Tee to increase.
Figure 3. Demand and Supply of Tea from Sri Lanka
The International market for Tea from Sri Lanka 2013-2017
The economic theory of Demand and Supply justifies what has been happening within the Sri Lankan and Kenyan tea prices. The theory states that within an increase in supply the price of products will tend to drop significantly and with the decrease in supply then the price of products with increase significantly, this ideally relates to the global price's tea has been fetching. Due to the decrease in supply caused by bad weather condition in tea producing countries, Kenya being one of them has made tea prices of Sri Lanka to increase by about 11% since 2013 (Hirata " International Monetary Fund, 2013).
As shown from figure 3 we can ideally see that the supply of tea by domestic farmers has been increasing since the year 2013 and the domestic demand has been decreasing due to this increase supply of the product. This favourable Sri Lanka to produce more compared to tea producing nations which greatly prayed a role in the good prices' Sri Lankan Tea Fetched.
Exchange Rate Fluctuations
Exchange rate is the amount of local currency in which one is willing to pay to acquire one quantity of foreign currency. A local currency can appreciate or depreciate depending on other economic factors. Appreciation and depreciation of local currencies greatly determine on the kind of price a nation will sell its tea to the global market (Karunaratne et al. 2015). Exchange rates can be classified as either pegged or floating. In a floating market, usually forces of supply and demand will dictate the value of your local currency and with a pegged market the exchanger rates is set by the regulator. Mostly world exchange regimes are set as floating and this thus means a lot of uncertainty, which will significantly affect international trade and the kind of price product, will fetch.
According to Gustav, in the purchasing power theory he articulates that exchange rate volatility affects the aggregate demand and supply of any country. Usually an increase in volatility will mean that there would be a decrease in demand for product from a specific nation. This put any producer at risk because of the exchange rate volatilities, which will greatly determine the kind of price their product will fetch. The appreciation of the dollar towards when compared to the Kenyan shilling we see that over the past year the value of the Kenyan shilling has declining compared to the Sri Lankan rupee which has been doing well in the international markets. When local currency depreciates then it means that you might be forced to adjust you market prices in order to compete with the global market producer of Tea. This is what is causing the major price fluctuations of tea between Sri Lanka and Kenyan (Kottawa-Arachchi, " Wijeratne, 2017).
Governmental Regulations
Government policy plays vital role in ensuring that the tea market prices remain steady. Usually some governmental policies determine if there would be conducive environment for conducting business in the Agricultural sector. One of the regulations that can have an impact on the price charges of Tea product is offering of subsidies to farmers, this then means that that it must allow the importation of this product. What happens when this is done is that when certain goods or products are imported to the country, we will have an increase in supply of the product which will affect the price since the demand will be low (Sachitra, n.d).
When comparing this two countries Sri Lanka and Kenya we find that government policies have greatly played a role in the kind of market prices tea fetch. For example, in Sri Lanka the government has introduced programs that are meant in correcting market resources, more financial resources have been put in place in ensuring that farmers get the best prices for their products. Some of the resources that have been put in place are like building of research centres to assist in improving the production of tea, offering of incentives, replanting and mainly factory Modernization. This is huge contrast to what the government of Kenya is doing about the falling tea prices. Most of the financial resources put in place by the government to assist in improving this sector is embezzled. In addition to this, the Kenyan government has not implemented much policies unlike compared to their Sri Lankan Market (Sachitra, n.d). For example, most of the Kenya Tea factories have been not been fully modernized or updated according to the required international standards. This then greatly goes a long way in determining the market prices because of lower production and that is why market prices of Tea have been declining.
In conclusion, since 2013 the global market prices of tea has been increasing because of the global demand of this product, although the increase Kenya tea prices has been declining because of other factor such as price fluctuations, governmental regulations and change of weather pattern as some of the element that significantly contribute to price fluctuations of tea we are seeing globally.
References
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Karunaratne, G. M., Nissanka, S. P., Punyawardena, B. V., " Gunawardena, A. R. (2015). Vulnerability of tea sector for climate change in the major tea growing regions in Central Hills of Sri Lanka. Journal of Environmental Professionals Sri Lanka, 4(1), 29. doi:10.4038/jepsl.v4i1.7852
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Tea Exporters Association Sri Lanka. (2017, March 4). Retrieved from http://teasrilanka.org/tea-prices
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