Tea-flation threatens the nation's favourite drink

Political turmoil and poor weather are pushing up prices. Sean O'Grady reports

More tea, vicar? That could become a very expensive query if the present trend in the world price of the nation's favourite drink persists.

The wholesale price of a kilo of tea has doubled in a couple of years, to a peak of about $4 a kilo, pushing the price of a box of 80 tea bags up about 10 per cent, towards the £2 mark. After decades when both the wholesale and retail price barely shifted – much to the detriment of the tea pickers of India, Kenya and Sri Lanka, among the lowest-paid workers on the planet – the balance of power seems to be shifting towards the producer. What's going on?

The short answer is that supply has fallen and demand has risen. In three of the main tea-producing countries of the world, political disturbance and poor weather have conspired to restrict supply.

Tea's troubles began in Kenya with the election crisis and violence of last year and 2007. That displaced the tea plantation workers, disrupted supply generally and disabled Mombasa as a major centre of trading and export for the whole of east Africa, including smaller tea-producing nations such as Tanzania, Malawi, Uganda and Zimbabwe. Some 50 per cent of the tea consumed in the UK comes for this part of the world, all former territories of the British Empire. A protracted dry season in east Africa has meant that tea leaves normally harvested on, say, a 10- or 21-day cycle are now being gathered every 30 days instead. Production is running about 11 per cent behind last year's levels.

Meanwhile, a drought in India has caused mayhem in the production of virtually all her staple and cash crops, including sugar, rice and wheat, and tea. Late monsoons have hit west Bengal and Assam particularly badly. Separatist activity and a strike have also exacerbated the problem in Darjeeling in India, knocking production back by 20 per cent in the state. In Sri Lanka a serious frost on higher ground has also inflicted damage on the crop, even as the political situation there has eased.

The upshot of all this is that the price tea is fetching in the auction houses of Mombasa, Calcutta, Djakarta and Colombo is hitting highs never see before.

Bill Gorman, executive chairman of the UK Tea Council, explains: "For decades there has been structural oversupply in the tea market.

"The world's tea plantations produced about 2 per cent more than the world drank, which kept prices low and the industry very competitive. Usually if there were 120 lots of tea on the floor of an auction house, 100 or 100 would get sold. Now it's 120. It's about time the farmers got a decent price for their tea."

While the wholesale prices have been more or less stuck in the $2 to $2.20 range since the 1990s, costs of production and transportation – labour, diesel, equipment – have risen by far more. It is one reason why developing world charities have highlighted the plight of tea workers in their fair trade campaigns.

But the demand for tea is growing, at least in the UK.

Coffee, says Mr Gorman, is hardly a competitor for tea; it's cold drinks such as Coke and bottled mineral water (criminally bad for the environment) that has been the more potent threat. Still, tea gets a fairly good press these days, with some extravagant claims made for its anti-oxidant qualities – and consumption is growing again, he estimates by about 2 per cent a year.

We consume around three cups of tea per head per day nowadays – 165 million cuppas. It was four cuppas a day in the 1970s, but the trend now is mildly positive, and much more so for the speciality teas such as Earl Grey. Ultra-expensive "gourmet" teas, analogous to fine wines, are also a growing presence. Cornish grown tea is the ultimate extravagance, apparently. There are also the green teas and iced teas, also novelties in the UK. But as a (usually) cheap drink and an effective method to rehydrate and refresh – hence perhaps the British building trade's legendary attachment to it – demand is pretty inelastic, and it has proved to be recession-proof.

Ironically, considering the speculative pressures that have helped to gyrate the prices of oil and other commodities over the past few years, the tea market probably suffers from its relatively unsophisticated, even quaint trading methods. It renders it slightly illiquid, if you'll excuse the pun. There isn't much in the way of futures, let alone complex derivatives, and the main auction houses are only now beginning to experiment with digital technology. So we certainly can't blame some flash traders in Chicago or London for the inflation in the tea price, but tea farmers also suffer if they contract to prices that turn out to be higher later on – there are few hedging products available for them.

Reading the tea leaves, the outlook seems to be for more of the same. Last week prices of African black tea (the usual British cuppa) were still at near-record highs for top grades of the leaf. The Kenya Tea Development Agency said that the "serious" drought there will cut production "heavily".

So the best guess of the experts is that tea prices could rise a further 10 or 20 per cent, an object lesson in market economics. Even so, we are unlikely to switch our traditional allegiance. "More coffee, vicar?" just doesn't have the same cultural resonance, does it?