Let’s start with what is called in French a “Café du Commerce” analysis (mostly a popular wisdom analysis that you can hear in most cafés): tea prices are too high.
You do agree, right? How many times did you hear that? Or perhaps even say it?
I once explained why the same teas sold by two different companies could be sold at different prices(Whats in a name?…Price) but this is not really the point made by popular wisdom here.
The point is more that the price of the commodity itself is high.
Since I begin to write this blog, this question of prices has been fascinating me. Why?
Because tea is for now still sold through auctions and is one of the last (if not the only one) commodities to be sold that way.
This means no futures (to be simple and unfair to what was supposed to be an insurance product about bad crops, let’s say that it is a way for the financial markets to speculate on the prices of commodities but if you want a more impartial definition, just follow the link Futures Contract) and therefore no speculations, only the good old supply and demand meeting each other and deciding for a price.
The perfect dream of any economist, no?
Don’t be afraid, I won’t try to find out if there is speculation on the prices of tea but I will try to find out if it is true that prices are high.
To do this, I needed data (yes, economists can live on a diet made mostly of statistics, data and figures but not without a drink, which for me is obviously tea) and I was lucky to find two online sources: one with the monthly prices (in US cents per kg) of the last 360 months (starting for me in November 1981) at the London and then at the Mombasa auctions (Monthly Commodity tea price from IndexMundi) and the other with the weekly average prices of tea at the weekly auctions of Sri Lanka, Indonesia, Kenya and Malawi from December 1999 to June 2002 (Dharmasena, Kalu Arachchillage Senarath Dhananjaya Bandara (2004). International black tea market integration and price discovery. Master’s thesis, Texas A&M University. Texas A&M University. Available electronically from International black tea market integration and price discovery)
Then I had to cross check the data to see if it was usable for me and the answer was that the first set of data was usable while the second wasn’t.
Why? Because according to the methodology from the author, he had to make some guesses and assumptions (that might be right but I wanted fully reliable data) and second because I had no easy way to know when these auctions were hold, making the second step of my analysis a lot harder to do.
So what does these sets of data look like?
To be as complete as possible, you will find below both of them (for the second one, I put everything at 100 in the first week so as to compare the evolutions of different prices labelled in different moneys) but I will only use and comment the first one.
You will all see that after a kind of bubble in 1983-1985 and another in 1997-1998, the price was moving around a central value of more or less 200 cents per kg and this until 2005 when it began to rise to reach a little over 350 cents per kg in November 2011, meaning a rise of 175% between 1981 and 2011.
So now, you will begin to wonder why did it rise like that? That is a good question but one I will not answer here as there are several plausible explanations and one set of data even over 30 years might not be enough to find the good one (or good ones).
The next thing you will begin to say is that the good old popular wisdom was right and that we are all sheep waiting to be sheared.
Since you know me a little by now, you can easily understand that the answer might not be as easy as it seems.
Why? I hear them (you know them, the guys sitting at “Le Café du Commerce”) say, “the data is here, you must recognise that we are right.”
I am sorry guys but there is still a little something I need to check before telling you that you are right or wrong.
What do I have in mind exactly? A simple thing : nominal vs. real values.
You are probably thinking this is another strange concept but it isn’t.
You all know that the value of money changes overtime or put it in another way, for 1$ today, you don’t buy the same amount of a given product than 20 years earlier.
You might argue it is just a trick to make things more complex but it has more to do with inflation than with tricks, ie prices go up and down each year following inflation or from time to time deflation, so 1$ of 1991 would be more or less worth 1.6$ of 2011 (I said more or less because I didn’t bother what should be written after the point).
So, what do these new figures tell us?
We see that the same bubbles over the years but what is more important is that tea prices have decreased.
Yes, you read me right. In the last 30 years, the price of the auctioned tea has become cheaper in constant money.
You should feel lucky to live nowadays, shouldn’t you?