The world tea economy : supply, demand and market structure

Abstract

In this study, the supply, demand and the market structure of the world tea economy are analysed by formulating a commodity model. The use of an overly stylized model in the modelling of any primary commodity is found to be untenable. The specific characteristics of the commodity such as its physical characteristics of perishability, the nature of the production process etc., must be given consideration before proceeding to formulate the model. A clear distinction is made in this thesis between the intermediate output which is tea supplied by the producers (input tea or tea I) and the final output which is tea consumed by the consumers (consumer tea or tea II). The role of the intermediary who buys the input tea,blends and sells consumer tea, in the price determination process is extensively discussed. The supply of the perennial crop, tea, is considered in a framework of a vintage production model and a number of useful insights into the formulation of the supply model have been derived. Its relationship to the more standard Nerlovian supply model is also spelt out. The demand for consumer tea is estimated with the price for tea II, rather than the usual erroneous practice of using price of tea I. An important innovation of this study is a simple method to test empirically certain hypotheses regarding the market structure of certain primary commodities through an econometric commodity model. This simple test and the investigation of the role played by the intermediary strongly suggests that the input tea market is essentially monopsonistic. In the light of the above conclusion, it is found that the present policies discussed in international organisations to alleviate the problems of the tea producers are inadequate. Alternative policies such as producer collusion to bargain for a higher price, or forward integration into the tea processing industry, are theoretically analysed and found to have some merit.