A cartel storm in a tea cup

If having the Opec oil cartel pushing up the price of crude was not bad enough, now another cartel has emerged in tea.

Yet, this could be a cartel storm in a tea cup.

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Earlier this month, six major tea-growing nations announced the creation of the International Tea Producers Forum, a new organisation to promote the commodity. The official aim is to “promote, develop and ensure sustainable production” of tea.

But some officials quickly said that “price stability” – the euphemism among cartel officials for “let’s push up prices as much as we can” – would be on the table.

The headlines soon followed warning of imminent price hikes for the popular cuppa. “World’s tea producers brew up a plan to raise prices,” one of the alarming stories read. Another added: “ ‘Tea cartel’ formed to boost profits.”

The alarm is testament to the profound impact the accomplishments of Opec has had in the public’s mind. But the success of Opec masks the failure of half a dozen other cartels. Since the 1960s, developing nations had argued for stronger commodity cartels to improve the terms of trade of bananas, coffee, cocoa, rubber, tin, or sugar. Cartels become part of the decolonisation and development process.

But most of these cartels “accomplished far less than their signatories set out to achieve”, says Mark LeClair, professor at Fairfield University in the US and author of International Commodity Markets and the Role of Cartels.

Moreover, recent attempts to create commodity-related bodies have shown that, after the initial alarm among consumers, very little actually happens, mostly because countries find it difficult to co-operate. For example, the recently created Organisation of Natural Gas Exporting Countries Forum – dubbed with some initial alarm Gas Opec – has not developed into a proper cartel.

Tea is very likely to face the same fate as previous cartel attempts in soft commodities such as sugar and cocoa. “Tea could be grown widely – if they force prices up, other countries will enter into the market,” Prof LeClair says.

The six signatories of the International Tea Producers Forum are powerful in the market. They include some of the major exporters, such as Kenya, India and Sri Lanka. The supply and demand balance is also in the favour of the producing countries.

After years of surpluses, the tea market now faces tight supplies due to unfavourable weather. The wholesale price of the highest quality black tea – known as broken pekoe one or BP1 – hit $4.4 per kg last month, a level seen only once in late 2009, when prices reached $5.45. Worse, the price of medium quality Best Pekoe Fannings surged in December to $4.14 – a record – and up nearly 160 per cent in over a decade.

With prices rising sharply, tea drinkers have a reason for concern. But rather than worry about production controls to boost the price of tea, drinkers of sweet brews in Cairo, milky cuppas in London and iced tea in Los Angeles should worry more about something more mundane: the weather.

The Commodities Note is a daily online commentary on the industry from the Financial Times.