The Green Tea Production in China: Health Gains - Research Paper Example

1. Provide an up to account on the production, consumption, and exporting of tea In the world tea production, there are two major kinds of tea, the green and the black tea. The black tea production accounts for roughly seventy five percent of the world’s production, and more than ninety percent of the market share in the countries from the West. Black tea is obtained from oxidation of tea leaves, while green tea is attained from steaming, rolling, and drying of tea leaves without oxidation. It should be highlighted here that most of the green tea production is China based and it has been gathering pace due to its health gains. On the basis of FAO projections, the production of world black tea is expected to grow by two percent in the next ten years on an annual basis. That is on a rough estimate from 2.1 to 3.1 million tones. At the same time world production of green tea is expected to grow at a faster rate of around 4.5 percent on an annual basis for the next ten years. During this time FAO expects that tea production would outstrip the consumption part (Agritrade, 2009). Tea is basically grown in thirty six tropical and semitropical nations. Twenty one of these are from the ACP region. The first six biggest producer countries include; China, India, Kenya, Sri Lanka, Indonesia and turkey in that respect. This group accounts for eighty percent of the global output. However, it is only less than half of the production which is exported. This is because China and India are major consumers of their own productions. Since the period of 1993-95, global tea production has grown by around two percent. At the same time, consumption in Western states has less than matched this growth by only increasing by a one percentage upward move. In the year 2007, the world tea consumption was on a virtual stagnation point. The increase was quite minimal rising from 3.649 to 3.668 million tones on the basis of the year before. However, in a number of developing countries, the production pace has matched the consumption rate or in other states. In other cases it has fallen short of consumption demands. In this period, China’s consumption overtook that of India as a result of a thirteen point six percentage increase. It is also worthy mentioning that the United Kingdom purchases roughly half of the consumption of the European segment (Agritrade, 2009). The global production of tea witnessed a 2.3 percent growth rate in the year 2007 which saw production levels hit the 3.7 million tones level. It is the Chinese production that accounted for thirty point six percent of the total production, closely followed by India’s 24.5 percent, and the Kenyan level of 8.1 percent. Tea production Main world producers and leading ACP producers Production in 2007 (tonnes) China 1,186,500 India 949,200 Kenya 315,000 Sri Lanka 304,600 Indonesia 192,000 Turkey 191,605 Malawi 39,000 Uganda 35,000 Tanzania 31,000 Zimbabwe 22,300 Rwanda 19,000 World total 3,735,178 Source: FAO On the other hand, the ACP regions accounted for on average, thirteen percent of the production. But on the export side, the regions contributed a twenty eight percent to the global market. In reference to the 2008 FAO figures, there is a pointer to increased consumption reaching the height of 3.86 million tones. It is also highlighted that droughts in major production countries like Kenya, India, and Sri Lanka in the periods of 2008 must have been responsible for the decline in the world tea production. Therefore, during this year production was lower than the demand for tea consumption (Agritrade, 2009). How do individual producers affect tea prices? There has been a push to have tea prices raised. This is because of the volatility in the international markets. The role of auctions, multinationals, trade agencies, accompanied by the rarity of a single dominant individual producer means that tea production. Processing and sale would never be at the hands of individual producers. As a result, individual producers have almost no say in the determination of tea prices. Their role is only to concentrate on the production of the plant and leave the rest to the agencies and multinational corporations. The often mentioned collusions of the lead agents in the tea industry also negate the chance of an individual producer having much say on pricing. Only the adoption of fair trade practices can rescue the individual producer as in regards to price determination. And this can only be achieved if the individual producers can come together and strike a consensus which would enable them to control their output. This would be appropriate if done in the OPAQUE style. What is the role of transnational corporations in the tea market? It is not surprising that a small number of multinationals dominate the industry. They typically get engaged in all production aspects of tea production to its sale. They either grow tea or buy and process before marketing it. They acquire it at a low price but eke a high return from it. These companies are powerful and can easily freeze a country out of production at will. So the producing countries have no option but to cooperate. One major large participant in this trade is the Unilever Company. The company grows 35, 000 tones a year on its Kenyan, Indian, and Tanzanian estates. Additionally, it buys and sells much of its output that stands at 290,000 tones from more than other hundred countries. Then its processed products are sold globally at unreasonably high prices (Agritrade, 2009). Apart from multinational companies, auction centers dominate the tea industry. In the ACP countries there are two major auction centers, one based at Mombasa and another at Limbe in Malawi. The Mombasa auction serves Kenya, Malawi, Rwanda, Burundi, DRC and Tanzania. The auction system is supposed to be premised on fair play, something which has not been attained so far. The interplay of supply and demand has not been allowed to take place. The quantity and the quality of tea that is offered is what determine the pricing of tea. But given that it is a small group of companies that dominate, the market forces are never allowed to play their role. The African auction centers and the Dubai tea trading centre are the major auction players at the ACP region. The Dubai group is responsible for production and processing of tea in thirteen countries including Kenya, Malawi, Zimbabwe, Ethiopia, Rwanda, Tanzania, Nepal, China, Indonesia, Vietnam, Sri Lanka, Indonesia, Ethiopia, India and Iran. The centre serves Middle East which is the most important part of the Kenyan tea. There are several players in the tea industry that make it difficult for one player to fully take control of the market. It is however noticeable that price varies from one auction to the next. There was a price increase from 203 dollars to 242 dollars in the period 2007 to 2008. And in the first three months of two thousand and eight, there was a fifteen percentage rise on average on the pricing of tea at the Mombasa auction in relation to the 2008 December level which was attributed to droughts which had been ravaging most parts of the African region. Year FAO composite prices, US$/kg Annual growth rate 2003 1.52 2.7% 2004 1.66 9.2% 2005 1.64 -1.2% 2006 1.83 11.6% 2007 2.03 10.9% 2008 2.42 19.2% Sources: FAO: Committee on commodity problems – Inter-governmental group on tea current situation and medium outlook - May 2008 ftp://ftp.fao.org/docrep/fao/meeting/013/k2054E.pdf F.O. Lichts, World Tea Markets Monthly, February 2009, average of three main auctions (Calcutta, Colombo and Mombasa) 2. What are the main Supply and demand factors that affect tea prices? The rise in price is thought to have come from the oversupply chain situation that was apparently on the improvement scale. However, if we chose to account for inflation, the real price for tea has dropped in a much substantial manner. The information factor affects both demand and supply. An informed producer would know in which auction their produce would fetch the highest amount. But it should be noted that individual producers may not be in a position to possibly influence production. On the converse, information on tea pricing would affect consumption choices. This is because alternatives to tea exist and buyers may revise their options accordingly. On the basis of information, buyers would also discriminately select where to make purchases. As a result some sellers may face poor business outcomes and also be forced to go back to the drawing board and make appropriate adjustments. The world process of bringing buyers and sellers together may develop to sophistication and hence improve the pricing. The collusion factor may hinder the use of information on the part of buyers. It is speculated that top players have been colluding to fix prices in the auction of Mombasa. In this case, the market forces may not be able to affect the choices of consumers and producers (Agritrade, 2009). The production levels influence demand and supply. When there is high production that outstrips the quantity demanded, the pricing would come down and as a result push the demand levels higher. On the contrary, when the production is low, this would push prices up and thus lower the demand for tea. However, as this occurs, if it is a free market model, the movements would normally tend revolve around the equilibrium position. Apart from the quantity supplied, the quality of the tea produced would also affect both the demand and the supply. A high quality product would raise the quantity that is demanded. In reaction to this, processors would increase their quantity of production so as to raise their returns. An increased production would subsequently flood the market which would lead to lowering of the prices. In the Kenyan tea market, there has been volatility that affects the industry. Exchange rates, political crisis, unfair trade practice among other factors have been hugely responsible for this problem. In the year 2006 the US dollar was exchanging for around 60 Kenyan shillings. The exchange rate alternated swiftly and as early as January of 2007, the exchange rate stood at over 80 shillings against the US dollar. This vulnerability of the Kenyan shilling indicates its unreliability in trade. It should be noticed at this point that such changes in exchange rate may increase on tea earnings on paper but this is cancelled out or even outweighed by the high demand for inputs required in the tea production which are conventionally imported. On the unfair trade practices, it has been suggested that, major players like Unilever Company and the auction centers that operate in Mombasa have a huge power base that enable them to have almost full control of the market in terms of pricing. This means they can collude to fix prices to the detriment of the poor countries (Agritrade, 2009). The political crisis of 2007 in Kenya also affected the production levels of tea. This impeded free movement within the country thus affecting major economic activities. This was the beginning of instability in the currency market as it witnessed the loss of value of the Kenyan currency against many foreign currencies. 3. What are the effects of price changes in tea prices on poor economies? As tea prices fall, it becomes clearly visible that the biggest casualties would be the poor masses from the third world countries. Countries like Kenya usually earn a big chunk of her foreign currency from this business, a fall or decline in prices of tea and its products would have a direct and various serious consequences on this economy. The developmental agenda of any nation, more-so from the ACP region that relies on donor funding and this revenue would be at stake. It is also true that a bigger population of the African countries comprises of farmers. The fact that farming, especially in tea is their major economic activity, a fall in the prices of tea would prove to be disastrous to this group of people. These groups are already vulnerable and depriving them of their major livelihood would spell the onset of a downfall in health, education, and housing. Those groups of poor people that do not run small scale farming of tea are mostly employed in the tea plantations. A fall in pricing on tea would also in the same way affect them. The plantation owners would not be willing to pay the same rates of money to the workers when the price for the same output is going down. As a result, the management of such plantations may be forced to seek alternative tea plucking machines which would be relatively cheaper in the long run. To this end, it emerges that at stake are the very livelihoods and jobs of the African peasantry. Job cuts have already been witnessed in the Kenyan tea plantations as machines have been introduced to replace workers. The adverse effect of this is that a number of the displaced workers are the young generation. They are forced to move to towns and urban centers to search for jobs which are hardly available. How do shop prices affect incomes to workers and farmers? A rise in the prices of tea in the shops would never necessarily imply an increase in the pricing of income to workers and to small scale growers. This has been witnessed over time as the income prices remain static over long spells of time though there could be changes in the commodity pricing in the industry. The competition and market power are the major contributors to price stagnation in relation to payment to both the workers and the small scale farmers. As it has been pointed earlier in this paper, there are cliques of market players that dominate the market. As a result, they are the ones that determine what to pay and what not to pay. Even the poor African country governments cannot dictate to these powerful multinationals like the Unilever group. As also seen, these companies have the potency of eliminating or freezing production in a country. On this platform, tea producers in these countries lie low so as to be in good terms with the companies. As such, there is no chance that a rise in the pricing of tea in shops would translate to an increase in the payout to the workers and farmers. It is also prudential to mention the role of competition on pricing. If a product price goes up, competitors in the market are likely to adjust their production activities in addressing the situation. They would for example increase the production of the product in the hope of securing more returns. In this process, the market would become a wash with the product and as a result would push down the price of the product. The more number of players in the industry means no entity can take the control of the market. From this, it is visible why the prices of products may vary but not the pricing of income to the workers and the small scale farmers. 4. How does conspiracy affect the tea industry? In the ACP countries, there exist two major auction centers that run the trade in tea products. Other global companies, like the Unilever group also play a significant part in the industry. In any business venture the aim is always to make profits at whatever cost. An average mind is in a position to infer that there is no morality in business. The world has of late tended to lean towards the capitalist mode of production which is premised on the free market economy model. In the free market economy, every rational individual is assumed to be in a position of making the best possible choices given the availability of information. However, this mode is built on assumptions which rarely present the real market case scenario. It is true that information may not be available to all individuals. This constrains the kind of choices at the disposal of such a person. As is the case in the tea industry, market forces are rarely allowed to play a significant part in the determination of prices, incomes, demand and the supply. This has been so due to market power, collusion and maybe competition. It has been mentioned in this paper that there are few players in this industry. This smallness of the industry leaves the producers to vulnerable positions. This is because these few players may decide to collude and impede the normal working of the market forces. The powers that are enjoyed by major players like Unilever imply that it can coerce governments and producers to toe its line of operation. If this is the case, the free market economy model becomes only a paper product whose applicability remains suspect. Such companies as pointed earlier have the potential of undermining activities of uncooperative governments and producers. As a consequence, fair play is a hallucination whose achievability is a pipe dream. A Kenyan case The auction system is supposed to work to a fair approximation where prices are based solely on the interplay of supply and demand. But it is alleged that the system does not always work as expected in relation to small scale production of tea. The auction prices vary in considerable proportions. Of note is also the fact that a small number of players dominate this business. Apart from multinational companies, auction centers dominate the tea industry. In the ACP countries there are two major auction centers one based at Mombasa and another at Limbe in Malawi as earlier stated. There has been evidence of collusion between brokers in fixing of prices. A number of investigations carried out have shown that a high level of collusion persists in the buying exercise. There is a high degree of collusion between buyers and brokers. This has the net effect of reducing the earnings that reach both the worker and the small scale farmer. An illustration of this has been found by the investigation that was carried out by the Kenyan National Chamber of Commerce in the year two thousand and five. The KNCC found the situation to have been so grave that it called for the abolition of the tea auctions. This collusion actually complicates the fair competition policy which is often pioneered by the European Union. 5. Explain how Robert Marris’ theory of the firm applies to Tesco supermarket. Robert Marris put forward that the theory of the firm model rests on the basis of the behavioral assumptions as opposed to the idea that firms aim is to maximize profits. To Marris’s opinion, takeovers in business play a dominant role in this model. In short, what Marris has put forward is a theory of take-over bids. Marris’ theory of managerial capitalism is an important peace in the literature of economics studies. On the basis of the managerial capitalism theory, a number of reasons show why businesses initiate take-over bids. They are; the aspiration to achieve economies of large scale production plus the multi-unit aspect that accompanies it, the advantages that relate to tax considerations, the chance to profit from advertising and distributions benefits, as a response to the legal and environmental conditions, the financial advantages that accompany it, the patent advantageous position that it offers, desire to reduce competitors and finally gain from promoters (Homans et al, 1997). The period beginning 2006 has witnessed an upsurge trend by bids from Tesco to take over companies. In 2007, the company took over at the rundown town centre, on April 2007, there were talks of a takeover in Australia, and in the same year Tesco took over the garden centre chain. In June the same year, it took over the Dobbies chain in Britain. There have also been so many other takeovers that highlight how Tesco has practiced the Marris proposition. Tesco has turned out to be increasingly forceful in the recent years. In recent times, the business enlarged its market divide steadily and remained an invariable space behind Sainsburys. Nonetheless, Tescos split surpassed that of Sainsburys during the1995 period and, by the mid 1996, it had attained a 2% lead. This indicates that Tesco was looking forward to build on its management by continuously working to make sure that it is kept. Sainsburys, conversely, could be seen to have been self-satisfied, principally as it was ongoing in gaining a share. Yet, Tescos current aggression has been going on despite the unfortunate performance from Sainsburys. In the early 1996, the city became against Sainsburys on the basis of its allowance of Tesco to get far in front in terms of customer service, price competitiveness and loyalty. Also on the accusation front, Sainsburys was found not to have sufficiently promoted itself. While running several similar services as Tesco, Sainsburys was condemned to have failed in taking the lead to colonize the market. To add insult to an injury, Sainsburys appears to have remained unresponsive in a fast changing market. This reflects the debacle in the reward system of Sainsburys. On the other hand, Tesco was making much leeway in the market as Sainsburys slept on the job. Tesco’s key weapons in the war against its competitors were in the ability to retain retailer supremacy with the club card loyalty plan. Next to this was the subsequent launch of the debit card. These two moves must have given Tesco the clear initiative to wrestle control from the major industry rivals like Sainsbury’s. Sainsburys was not only slow to respond to this but it also failed to sustain its late charge to contain Tesco due to technical problems. Sainsburys spearheaded a price operation, Autumn Value, relating special offers on a number of products. Tesco followed suit with its Unbeatable Value range, leading to a price war. The effect of these events would enhance short-term volumes, relatively than assembling brand empathy, by mainly pressuring on individual retailers that previously have forever sold on value. Kwik Save was worst hit by this. Nevertheless, Tesco had managed to match ahead of Sainsburys. From this small preview, Tesco has been exhibited as an aggressive company that has initiated takeovers, done business practices whose aim was to take the complete control of the market. All activities by the company must have been carried out with the sole intention of acquiring a controlling platform on the market. In achieving this, several measures as discussed above were used either to send the competitors out of the market or to gain a top position. To that effect the economics of takeovers was highly the preferred mode of achieving dominance. 6. taking a country of your choice, explain how the use of fiscal and monetary policy has been used to counter the credit crunch and the problems that have arisen from the policies. Due to the rigidity in capital control, the Chinese financial institutions rarely experience financial crises that affect the United States of America and the other European markets. The recent increased involvement of the Chinese economy in the global production has thrown China into the fray and as a result, the current financial down-turn has affected her, though not in an equal measure. The Chinese economy grew by a reduced margin in 2008 as compared to the 2007 period. The drop from thirteen percent to nine percent illustrates the fact that the Chinese economy is intertwined with the world economy. During this period, the world economy was witnessing a credit crunch. Hence, the decline in China’s economic growth is attributable to the global forces. After this realization, the Chinese policy makers chose to alter their macro-economic and industrial policies in a bid to contain the emerging recessionary effects. The most noticeable policy intervention was the release of a stimulus package worth four trillion Yuan in the 2009-2010 periods that was announced in November of 2008. This intervention was aimed at stimulating domestic demand through enhancement of public expenditure. Most of this money went towards the rehabilitation and the development of infrastructure. The expansion of infrastructure has a multiplier effect in any economy as it lowers production costs relative to poorly developed places (Zhang, 2007). Through such intervention, the Chinese government was attempting to cushion its people from the consequences of the credit crisis. A closer scrutiny of this policy shows that this would lower demand for foreign products because of the relative affordability of the local goods. This policy consequently increases the credit problem because countries that count on the Chinese market will be locked out. In this way, the American firms that had large markets in China were forced to find alternative markets hence compounding the credit problem. Apart from the above mentioned measure, the government also announced that it was considering announcing tax reductions that would include: business tax cut, value added tax reforms, an upward adjustment of the export rebate charges, raising taxable income thresholds among other measures. The Chinese Prime Minister, Wen Jibao, promised to put in place other fiscal stimulus in the case of continued poor performance in the export sector. All these measures appear towards building an inward looking economy with the potency of denying other countries access to the Chinese market. In pursuing an expansionary fiscal policy, China was actually exiting from her relatively tight monetary policy which has been in place since 2003. This was achieved by cutting down on interest rates to historical record levels, lowering bank requirement reserve ratios, and suspending quota control on commercial lending. This facilitated China to successfully inject a big portion of liquidity into the banking system. The Chinese economy micro-economic policy helped to reduce the credit crunch as a result of increased willingness to lend by banks. The mortgage industry was also relieved through the loosening of the control on mortgage loans. This could serve as a stimulant for residents to purchase property. Owing to these measures, China’s supply of money and bank credit rose rapidly in the first quarter of 2009. Domestically, the policies adopted by the Chinese government have gone a long way in addressing the credit crisis (Mingchun, 2009). This does not in any way help in mitigating the international crisis as in the end it actually exacerbated the problem, for example by lowering interest rates domestically leading to alienation of the other markets. The risks posed by these measures are wide ranging. To begin with, mortgage reductions do not guarantee reduced pricing in housing facilities. It has been reported to have produced a counter-productive result by leading to an increase in housing prices. New bank loans were also infused into stock markets resulting in an adverse effect on the economy. The policy aimed at increasing bank lending failed as banks eventually reduced their lending. Increasing export tax rebates slows down the economy’s excessive reliance on external products. By trying to disconnect with the outside world in terms of making the economy internally dependent, China was in a way contributing towards the aggravation of the global financial credit problem. This is achieved through making of difficult conditions to engage in commercial activities outside the country, for instance, Chinese firms operating outside the country could not borrow from banks in their areas of operation. Effect of money supply on inflation Money supply Inflation The above graph presents a hypothetical view on the effect of a monetary policy. An increase in money supply would raise the levels of inflation as more money chases a limited number of goods. A stimulus package like the one adopted by the government would lead to this scenario. Effect of money on imports Money supply Imports An increased money supply would push local prices high. As a result, foreign products become relatively cheaper. Consequently, the demand for foreign goods would rise, leaving the economy in trouble. References Agritrade. (2009). News analysis of events affecting ACP agricultural trade. Technical Centre for Agricultural and Rural Cooperation ACP-EU http://209.85.229.132/search?q=cache:venPy_efLCQJ:agritrade.cta Homans. C, Hamblin. R, Kunkel. J, (1997). Behavioral theory in sociology: essays in honor of George C. Homans. Transaction publishers. USA. http://books.google.com/books?id=bcBPEvR7yrcC&dq=marriss+ Mingchun, S. (2009). China real time report, the wall street journal. Dow Jones & Company, USA. http://209.85.229.132/search?q=cache:p2jLmlVhyA Zhang. L, (2007). China’s policies Responses to Global Financial Crisis and its perspectives on the reform of international monetary system, Yu Yonging. China. http://209.85.229.132/search?q=cache:TwdV_i5E7mkJ:www Read More