Sri Lankan tea production fell by 53% year-on-year (y-o-y) in March to 13.2 million kg, with all three elevations (high-grown, medium-grown and low-grown) falling over the period. The aggregate Q1 2020 harvest of 53.26 million kg represented a 27% y-o-y decline(a shortfall of 20 million kg). In January, the Sri Lanka Tea Board (SLTB) announced a target of 340 million kg of tea to be produced in 2020, compared to 300 million kg produced in 2019. With this production target almost certain to be missed, the tight supply outlook does support bullish price expectations. Indeed, average prices at the Colombo tea auction increased by 12% month-on-month (m-o-m) in April to LKR 686.5/kg.
Sri Lankan tea prices have maintained a prolonged bull-run, increasing by 41% in the ten months to April 2020. Current prices at the Colombo auction are the highest recorded, notwithstanding weak export sales. Sri Lankan output has been declining for several years due to increasingly poor growing conditions, in addition to low mechanisation leading to low productivity among the predominantly smallholder farming population. Furthermore, measures implemented by the Sri Lankan government to contain the spread of coronavirus are weighing on output. The country has been in lockdown since 22nd March, and this has affected the most valuable first flush crop, which is picked from mid-March to mid-April. The government earmarked lockdown restrictions to ease on 26th May, although, the potential lagged effect of unpicked first flush leaves will likely limit the volume and quality of the second flush, commencing in June.
On the demand side, Sri Lankan premium Ceylon tea is highly sought after by consumers in Europe, including the UK. Falling demand from restaurants and food service businesses have been partially offset through home consumption. On another note, port closures and logistical bottlenecks in consuming markets are also contributing to the overall sense of tightness, providing further upside.