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Finding a Cup of Puerh: Factors in the Expanding Instability of the Market

By Scott Wilson, Kunming Yunnan

Profile
Scott is an American from the west coast. After some traveling he settled in Kunming, China and founded the tea export company Yunnan Sourcing. He has long had a passion for Puerh tea that translates well to his business. He spends most days working in the Kunming tea market with an ear to the floor of one of the largest Puerh trade centers in the world.

Reading over the article that I wrote for the 1st issue of this magazine only six months ago feels like something out of a history book! In that article I supposed that the domestic Puerh craze would continue, but I could never have guessed that demand would continue so strongly, or that focused and organized speculation in the market would drive prices up to such dizzying heights. Raw material (Mao Cha) prices have doubled and tripled from just a year ago; and factory products from famous brands like Menghai, Xiaguan, Mengku, Liming, and others have increased in price by 200% to 1000%. Why? There are several angles worth exploring in a discussion about the factors of this ridiculous price increase.

Much of the increase is due to speculation. Entire production lines released from a particular famous factory are often cornered, and then because of this collusion never get sold. When the price has been driven up high enough, these speculators dump the tea back into the wholesale market where the price can drop by more than half in just two days time. A good example of this was the 2006 Xiaguan grade A bowl tea (Jiaji Tuo) which in the middle of 2006, when it was released, was being sold wholesale for approximately 40 RMB per kilogram. By December of 2006, speculation had begun and the price had risen to more than 100 RMB per kilogram; and then in April of 2007 it had risen to more than 380 RMB per kilogram, which is nearly a 1000% increase in 8 months. Then, in May of the same year, those speculating this tea got scared and the largest entities holding stock quietly began selling it off. Within just two days time the price had dropped to 200 RMB per kilogram. Xiaguan Tea Factory has yet to release its 2007 grade A bowl tea (Jiaji Tuo), but word in the market is that it will start at about 160 RMB per kilogram.

In my last article I predicted that the Mengku Shuangjiang Mother Tree Tea cake (Mushu Cha) would be a good investment (as it was in 2005). Since its release in mid-2006 this stock has already increased in price by more than 300%, and just this week (mid-May 2007) the price for their 2007 release was announced: it will be more than double the price of last year's. Both the Haiwan Tea Factory and Six Famous Tea Mountain Tea Factory will also slightly more than double their prices from 2006 to 2007 for similar recipe cakes. These businesses, although established and well-known, have worked hard to keep their products affordable and accessible to customers by discouraging speculation and maintaining a diverse network of distributors. All other producers are expected to increase their prices for 2007 teas by a minimum of 80%.

Demand

While the incredible increase in prices is mostly due to speculation in the market, a real demand Puerh is in fact a part of this increase. China is the most populous nation in the world, with thousands of years of tea culture. It is, therefore, not surprising that Puerh is being more widely consumed now that the sociopolitical/economic milieu is progressing. As the economy grows at a blistering rate, Chinese people are pouring incredible amounts of cash into the advancement of their own material life. Puerh tea is often purchased in the hundreds of kilos by Chinese, as a symbol of status, for drinking and even as gifts. So many Chinese people are starting to take pride in Puerh, as it is native only to Yunnan, increases in value and attractiveness with age, and is regarded as a health tonic. A trip to Yunnan is in most cases always accompanied by a purchase of Puerh tea. This very real consumption and enjoyment of Puerh is perhaps the driving psychological factor in the justification for the dramatic price increases we have seen— as more Chinese people have access to some form of disposable income, the increase in the consumption of Puerh will grow too.

Drought

Spring tea in Yunnan comes early: it is usually picked at the very end of February and on into March. The warm sunny weather should be interspersed with enough rain to allow the tea plants to flourish and bear fresh leaves and buds. This year, however, there was a period of almost 2 months with almost no rain whatsoever, and as a result the net yield from this year's harvest was significantly lower than normal. A decreased harvest, coupled with the strongest demand for spring raw material from big and small producers alike, created a situation where the raw material price index doubled and tripled across the board. Many smaller and even medium-sized producers that have traditionally headed to southern Yunnan in March to purchase raw material (mao cha) for Puerh production found that all of it had already been reserved more than six months earlier, mostly by larger and more organized entities.

In the beginning of March 2007 the news of this low yield, coupled with very strong demand, caused many tea sellers and producers to temporarily stop selling their 2006 stock as they waited for word of the spring price index (for fear of selling too cheap). By mid-March many producers were unable to purchase mao cha at prices they considered reasonable. Others chose to purchase, but at prices double or more than last year. Consequently, most vendors doubled the price of their existing stock of 2005 and 2006 teas. As spring 2007 mao cho was pressed into cakes and bricks and brought to market, prices for teas from lesser known tea factories, and even tea factories that have not been targeted by speculators, went up 100% to 150% from last year. Prices for wild arbor raw material from famous mountains like Ban Zhang, Yi Wu or Jing Mai have doubled and tripled, almost ensuring that they will be blended with less attractive raw material from other areas to meet such a strong demand.

Puerh stock market?

2006 saw the Beijing Central government's institution of a hefty real-estate transaction tax that was aimed at muffling the widespread corruption in the real estate market. Investors were buying access to first offerings in new real-estate developments only to sell them within days to others for much higher prices. As real-estate ownership is easily regulated, due to deeds and titles, the new real-estate tax was indeed successful in discouraging the "flipping" of such property. You might be asking yourself what this has to do with Puerh. A lot, actually, as much of this money ear-marked for short-term investment in real-estate has now found its way into the Puerh tea market. There is absolutely no regulation in the purchasing and selling of tea by tax authorities, so it is a great vehicle for purchasing and selling just like stock. The trade of Puerh need not involve a state-regulated brokerage firm and there is no paper trail whatsoever,

Cornering the market...

Ok, so what then is to prevent me from buying a large stock of one or two types of Puerh and selling them a few days or weeks later for a lot more than I paid? And what Is to ensure that the tea will actually increase in price as fast as I want it to? Well, if you have a lot of money and a lot of contacts in the industry you and perhaps a small group of tea investors could purchase all of that particular kind of tea, and even send your agents to scour the markets with instructions to purchase if the price is too low or simply inform the seller the price at which they ought to be selling it at. Competition might be a barrier to this plan, but since the middleman is at the mercy of the larger distributors, or famous tea factories, it might not be worth it to rock the boat, especially if you might be able to sell your stock for even more money later on.

The end of 2006 saw prices rising dramatically on three famous brands of Puerh: the first to jump was of course Menghai Tea Factory products, which have such an established and long history of consistent quality. In 2006, to become a Menghai Tea Factory "direct distributor" you needed to offer 5 million RMB to the tea factory. 2007 distributorship was only awarded with a 10 million RMB payment. In this way, a business could become a distributor and would have access to a certain amount of stock to sell to Its customers. Those of us who want to purchase Menghai Tea Factory products, but are not distributors, are lucky If we are able to purchase from these "first tier" distributors because the factory itself sets the prices. It sounds good: just find yourself a distributor and buy a case of this or a case of that... right? As demand for these teas has completely out-paced the ability to supply them, purchasing these products is something that requires not only determination, but also good standing. If I was a factory direct distributor, and I only have 500 cases of tea to sell (at a set factory price), and my customers would gladly purchase 2000 cases, I am going to have to turn down some customers. As much as I would like to give everyone the opportunity to purchase at the lowest possible price, I am going to have to choose one customer over another. Who should I choose and why? If I choose you, I am giving you the opportunity to make a lot of money. It is like a private IPO offering each time a new release of tea comes out, and therefore not so easily attained.

What about green tea?

Many green tea suppliers are no longer producing green teas anymore, as they can now sell their raw material to be used in the production of Puerh at a considerably higher price. Ironically, up until 2005 the tea of choice for most people in Yunnan was Simao green tea. Most of the people up in arms about the lack of green teas, and higher prices on what is available, are just average (especially older) people who have been drinking these teas for 50 years or more and have no interest in Puerh.

Is it Puerh?

I remember that just last year there was such a new and diverse range of Yunnan varietals of green tea available. This year the craze for Puerh has caused producers in Simao Prefecture (now renamed "Puerh Prefecture") to use their low-altitude raw material to make Puerh instead. This Simao varietal of Camellia Sinensis is in many cases -markedly different from true large-leaf Puerh (Daye Zhong). Although sun-dried and processed like Puerh these small-leaf (Xiaoye Zhong) and medium-leaf (Zhongye Zhong) varietals are not quite the same, and their use in the composition of Puerh tea cakes is questionable at best. Although Bangwei mountain of Xishuangbanna has tea trees with leaves that are mostly small-leaf varietals, most of which were transplanted hundreds of Years ago, they are typically blended with large-leaf raw matarial from other areas and grown at higher altitude (another important defining characteristic of Puerh). This use of green tea to make Puerh is largely unprecedented, and undermines people's confidence in the long-term aging possibilities, not to mention the aforementioned impact on those who enjoy a good Simao green tea.

The Yunnan tea market is going through growing pains at the moment. Puerh has become a fad in China and people are putting a lot of attention and money into it. The enjoyment is definitely there, but in many cases more focus is paid to status rather than the tea itself. Puerh has become a vehicle for those who want to make a quick buck and a lot of tea factories are being wooed by the big money offered by this new breed of tea speculators (not investors), and it is the consumers and resellers that are losing out. All this attention, stiff competition between producers, and ever-more discerning consumers may create a more favorable climate in the long term, and perhaps even better products, but for the time being the market just keeps getting more chaotic and disheartening for those who just want some good "Pu" to drink!