Month: May 2011

The classical economics (Part I)

May 27, 2011 / / 5 Comments

According to classical economics, prices are the result of the interaction between the quantities of a good supplied by the producers and those demanded by customers.

However for tea, the process is a little different as it involves auctions.

But in spite of this, I decided to stick with the classical economics and to try to describe the market with a first focus on the production side.

 

For this and other similar posts, I will use the world data provided by the FAO, the Food and Agriculture Organization of the United Nations, which goes back to the year 1961.

Here are a few findings (probably quite obvious but who knows?).

 

The world production averaged in these 47 years to nearly 2.2 millions of tonnes per year with only 983,825 tons being produced in 1961 against nearly 3,896 millions in 2008.

As can be seen below, the growth rate is quite impressive and almost constant.


But there is more to it.

 

I looked at the 7 (why 7? only because this number is more or less 20% of the total number of countries and together they produce more than 80% of the world tea production, another illustration of the Pareto Principle) biggest tea producing countries in 2008 (China, India, Indonesia, Kenya, Sri Lanka and Turkey) and the growth of their average production is more important than the growth of the average world production (*4 vs. *3).

Over the same period of time, the number of tea producing countries increased by nearly 30% (and this is without counting the new Republics from the former USSR) but almost a third of the producers have a yearly averaged production below 1 000 t (I checked and this ratio was the same in 1961 and in 2008).

Along the years, the weight of the 7 biggest tea producing countries in 2008 is slightly increasing (from 77.3% to 84% of the world production with a low point at 73.2%) with an important increase from mid 1980s on (linked to an increase of the Chinese production).


What can we learn from this?

Tea production is clearly fragmented with a “high” number of countries involved but with only a few “big fishes” and with one becoming the n°1 producer country and yes, it is China, which sees its share of the world production from 9.9% to 32.7%.

For those interested, the Indian share decreased over the same period of time from 36% to 20.7% (China became n°1 in 2005).

 

The real questions start from now:

  • Why did the Indian production grow less than the Chinese one?

  • Why was there an increase in the number of producers?

  • Why was there an increase in production?

Tea and Opium

May 18, 2011 / / 5 Comments

For All the Tea in China: How England Stole the World’s Favorite Drink and Changed History by Sarah Rose

 

To summarize it in a few words, this books is the story of how Robert Fortune stole the secrets of tea for the British East India Company to bring them from China to India in the middle of the 19th century.

Yes, this is right: tea was right in the middle of a James Bond novel, perhaps not the modern James Bond but at least a Victorian one.

But this is not what is really interesting in this book (or at least not for this blog). What I found truly fascinating are the reasons behind him stealing the secrets of tea.

Let’s sum up thFlag of the British East India Companyings: the introduction of tea in India and in the Darjeeling Estates is the result of an immune system, the immune system of one of the first megacorporation known to the world: the East India Company or British East India Company.

But in order to understand this, two little steps back in time are needed:

First, how was the trade balance between European powers and China? To be honest, it was not good: demand for Chinese products (tea, silk and porcelain among others) was high while China had no need for European products and wanted silver. For the mercantilist economists that ruled in Europe during that era, this resulted in a impoverishment (as the prosperity of a State depended on the amount of precious metal it owned) and this was not a viable solution on the long run. For the United Kingdom, it was even worst as it no longer used silver standard but gold one and it had to buy silver from other European countries, losing a bit of money each time.

This is why the East India Company, which held a monopoly over trade with the Far East (via a royal charter) decided to sell a high value commodity: opium (produced in the Bengal area, that more or less belonged to the British East India Company since Clive’s victory at the battle of Plassey in 1757).

Ship of the British East India Company

The high prices and increasing demand (from an estimate of 15 tons in 1730 to 900 tons in the 1820s) made sure that the trade balance was improving (Great Britain even fought two wars against China to keep this business running).

 

Then why did the East India Company needed to steal the secrets of tea? There are several answers to this question: first of all, they were slowly losing their trade monopoly (first with India and then with China) and were unable to cope with the new competitors (including other countries); they also needed more money to deal with wars and expansion on the Indian borders (which the Company paid for); last but not least, they were afraid that China might legalise the cultivation of opium and/or steal it from India (the Bengali opium was of higher quality than the Chinese one).

In order to solve all these problems, the British East India Company decided to produce their own tea in Darjeeling, a place that seemed well suited for these products. The first intents used tea found in Assam and tea smuggled of Canton but it was not a success and quality was low.

Now, you get the overall picture. The British East India Company had to deal with a big problem as they needed more money but had to give a lot of it to their suppliers.

This is the reason behind their first move: replacing money by another product, one that they could produce rather easily and that was highly addictive (making it even more profitable): opium.

The next evolution came from the increased competition (with the end of the trade monopoly) and the fears that China might become a competitor for the Indian opium. The only solution the British East India Company found was to keep on producing opium for the Chinese while at the same time, they tried to launch their own production of tea to take away that market from China.

The end result was an increase of the profits as once the quality had increased and the industrial processes were known, the Indian production could be sold on the London market while being promoted as safer as the Chinese one (as the Chinese used some dangerous chemical products to make their green leaves greener as Westerners always wanted the greenest ones).

 

In modern times, we would use words such as trade war, industrial espionage, marketing,…

Without judging its ethics or its success, it seems that the British East India Company was rather modern when it comes to business survival and evolution and that it was indeed the first megacorporation (in a true cyberpunk way) in history.

What is Teaconomics?

May 14, 2011 / / 0 Comments

This is indeed a good question and one that for now has no final or simple answer.

I plan to post things related to the history and economics of tea (hence the name), be them stories about tea trading now and then, tea production, info on tea companies (not on their products but more on what they do, how they do it…), book reviews and other crazy ideas I have in my mind.

I hope to turn this blog into something different while making it appealing and informative for all of you : in other words, I hope to bring some added value to you and to the wonderful world of tea.

I might be a little long between two updates but it takes time to read all the info I have and turn into something interesting for all of us.

Do not hesitate to comment and to try to influence me by giving me advices, info, book titles, thesis…