Price of a cup of tea to rise as demand soars
Student: Elie Gharib
Student Number: 16443365
Lecturer: Dr. Neil Perry
Due Date: 25th October 2013.
Drinking tea is much more than a habit but a cultural tradition that dates back for centuries. Second only to water, tea is the most consumed drink in the world. People enjoy a cup of tea especially in the winter season due to the many nutritional benefits it offers Tea is consumed by drying the plants’ leaves and boiling it in water. This is then drunk as black, green or white with milk.
Demand for tea is increasing every year; in the last decade, global demand for ...view middle of the document...
In certain countries where there are high tax rates on alcoholic beverages like UK (Alcohol taxes hitting consumption, 2011), people have adapted to consuming different types of non-alcoholic beverages such as tea, coffee, juice or soft drinks.
The majority of Middle Eastern countries follow Islam as the major form of belief where alcohol is forbidden. United Arab Emirates (UAE), a strict Muslim country, bans all types of alcohol consumption; as a result, tea is offered as an alternative beverage. UAE’s tea consumption at 6.4 kilograms per person per annum, is the highest in the region (Sayid, cited in Food and Agriculture Organization of the United Nations 2009).
Custom and Traditions also play a role in the demand. The term “tea break” that comes from the British culture is widely used at workplace. Tea consumption is thus used as a social norm during business hours (Fair Work 2013).
Taking all these factors and analysing them will lead us to the conclusion that quantity demanded will increase; thus a rightward shift in the demand curve as illustrated below.
Tea production is mainly controlled by a few countries; China, Kenya, Sri Lanka and India alone control 75% of the world supply chain. (Food and Agriculture Organization of the United Nations) Due to such monopolistic powers, these countries dictate the market. The main restrictions hindering the ability of these countries to supply more, is usually force majeure such as natural disasters or civil conflicts.
Whether we choose to accept it or not, climate change has a negative effect on agricultural producers. Kenya, for example, is facing one of the most severe adverse droughts in the past 60 years (Rohit, 2011) India is also constantly hit by major cyclones that are highlighted by governmental reports (Ministry of Earth Sciences, 2011) and Sri Lanka with terrible tropical storms all of which affect the tea crops(Athas, 2011).
Political instability is another factor that affects foreign investments like the ethnic war that took place in Sri Lanka for 30 years (Lanka Business Online, 2009). Unilever, Premier Foods and Associated British food continuously have to assess their risk before investing in some of the developing countries that supply tea, as any political instability will have a negative effect on their balance sheets and reduce shareholders confidence.
Taxes enforced by governments on producers increase the cost of production which reduces their profit; The Sri Lankan Government in the late 1970’s imposed a 50% tax on tea. This lead to market failure and thus losing 19% of its global market share (World Development Report, 1986 pp76). Farmers in this case could examine other alternatives and shift their production of tea to other alternatives that yield more profit.
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