India’s buoyant wage and fertilizer costs, part of the inflationary picture which prompted the country to go against the grain in raising interest rates, may revive flagging tea prices, which have fallen to a two-year low.
Malcolm Perkins, chairman of Camellia, the avocado-to-citrus grower, flagged "considerable concern" across the tea industry in India, the world’s second-ranked producer, at rising costs.
In West Bengal, where the company has plantations in the Dooars region, wage rise claims for the latest two-year settlement, due for renewal next year, are running at a multiple of the national inflation figure of 9.72% last month.
"The demands are highly substantial," Malcolm Perkins, the Camellia chairman, said, adding that they had probably been encouraged by a "good year" for the tea industry in 2010, where profits were buoyed by high prices.
"They probably think it’s a good time to ask for a significant rise."
However, international tea prices have fallen this year, with those at auctions in Bangladesh falling on Tuesday for a seventh successive week, to an average of 143.60 taka ($1.9) per kilogramme, down from more than 190 taka at the start of 2011.
On Wednesday, prices of high-grade tea in Kenya, the top exporter, fell below $3 a kilogramme for the first time since January 2009, weakened by a downturn in demand earlier this year caused by unrest in the Middle East, a key consuming region.
Kenya – which counts Egypt, where revolution led in February to the resignation of Hosni Mubarak as president, as its top buyer – expects its exports to decrease by 8.5% to 365m kilogrammes this year.
India’s exports, also largely to Egypt as well as Pakistan and the UK, fell by 12% in the first eight months of the year, a period during which production rose by 5.8% to 618.6m kilogrammes.
‘Gardens will close’
However, higher wage costs, coupled with increasing fertilizer and fuel bills, will likely curb output by forcing less profitable enterprises out of business, Mr Perkins said.
"What will happen is that the more marginal producers will not be able to deal with the costs," he told Agrimoney.com.
"Some gardens will close, affecting the supply-demand equation, and [domestic] prices will go up," a factor which could underpin international prices too – while fuelling India’s inflationary spiral.
The Reserve Bank of India, the country’s central bank, on Tuesday raised interest rates by 0.25 points to 8.5%, in contrast with moves to ease monetary policy in other countries, including many developing nations.
Brazil, Indonesia and Turkey have cut rates in recent weeks.