Page last updated at 22:45 GMT, Tuesday, 31 March 2009 23:45 UK

Tea prices are surging. Is your mug next?

By Kabir Chibber
Business reporter, BBC News

Cup of tea
The tea leaves in this cup were probably bought and sold in Mombasa

Your cup of tea may be about to get more expensive.

The United Nations Food and Agriculture Organization (FAO) says that demand exceeded supply in 2008, driving up the cost of tea.

Tea consumption reached 3.85m tonnes last year, up 4.8% from 2007. But production was only 3.78m tonnes, according to the FAO's preliminary estimates.

Tea was in surplus in 2007, but it seems the recent shortfall can only get bigger.

"This explains the current price hike, which shows that traders are expecting the worst," said Kaison Chang, an economist who works in the FAO's tea division in Rome.

Tea prices have soared as drought has hit Kenya hard in the past year, as well as Sri Lanka and India, which is the world's biggest producer of tea.

Traders' fears

"There've been reports of a 15% drop in production in Sri Lanka alone in January and February due to the drought," Mr Chang said.

If the shortfall turns out to be as deep as expected, then prices will go through the roof
Kaison Chang, FAO

All this has not gone unnoticed in Mombasa, a Kenyan coastal city of white sand and blue water that hosts tea auctions. These weekly auctions, which sell most of the tea produced in Africa, pretty much set the benchmark for the price of the crop throughout the world.

The average price of tea last year was $2.33/kg, almost a third higher than $1.76/kg in 2007, according to Kenya's tea board.

Black tea had jumped to a record of $2.70 last August.

But Mr Chang said he had heard reports that the price of tea had now breached $3/kg in recent weeks, as the scale of the crop shortfall became clear.

The new oil?

It may get even higher as tea traders worry the production gap will get larger.

Kenya, which is Africa's largest grower of tea, will probably produce 328 million kg of the crop this year, the Tea Board of Kenya said this month. That is well below the 345 million kg produced last year.

"If the shortfall turns out to be as deep as expected, then prices will go through the roof," Mr Chang said.

But much in the same way that rising crude oil prices push up the cost of petrol at the pump, this too is likely to increase the price of High Street brand teas.

The UK is the second-biggest importer of tea in the world, behind Russia, so any costs of the raw materials will either have to be absorbed by the teamakers or passed on.

British tea companies are also suffering from the decline in the pound against the dollar for the past year. Whittard of Chelsea said that the market was going through an "uncertain period".

"Areas are certainly suffering drought and there is no reserve of tea, so shortages exist," said Giles Hilton, Whittard's product director.

"Some prices might need reviewing soon," he said.

With global demand continuing to rise, there is little sign that production is going to be able to match.

More expensive cups of tea may have to become a fact of life.

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