Tea Prices

My lower sixth have been sent away over the Easter break to find an article that will form the basis of their first piece of coursework on microeconomics.

Remember candidates have to produce four economic commentaries (650 -750 words) based on news articles form within the last 6 months. These pieces must cover different areas of the IB syllabus. There is an article on the BBC website today that deals with tea prices and would be a an excellent basis for a micro commentary.

The UN Food and Agriculture Organisation (FAO) says that demand for tea exceeded supply in 2008 (a situation of excess demand). Tea consumption reached 3.85m tonnes last year, up from 4.8% from 2007. Production of tea was only 3.78m tonnes. This differs from 2007 when a situation of excess supply existed.

As a result of this excess demand tea prices have been rising. Supply has been hard hit in Kenya, India and Sri Lanka as drought has hit. There have been reports of a 15% drop in production in Sri Lanka in January and February of this year.

The price of tea at auctions in Mombasa, Kenya, was a third higher last year compared with 2007 ($2.33/kg in 2008, $1.76kg in 2007). In recent weeks the $3/kg mark is being hit.

There is a risk that prices will surge higher as tea traders worry that the gap in production will get larger. The UK is the second biggest importer of tea in the world, behind Russia, so any increase in costs will have to be passed on or absorbed by tea makers. The former is difficult to do given the current economic climate.

British tea companies are also suffering from the decline of the pound against the dollar. Whittard of Chelsea said the market was going through an “uncertain period”. With global demand continuing to rise there is little sign that production will be able to match.