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Puerh Price Predictions

Author/photos: Chen Zhitong

At the end of the year, leaving behind the fervor and changes of the market, we can reflect upon the starting point of the issues affecting Puerh tea with a different perspective. Reflecting back to the starting point is important, as many of these complex points are due to the basic structure of the market.

The significance of the starting point is often greater than significance of these theories. If the starting point is correct, the theory and conclusion must be correct. If the starting point is incorrect, the theory and conclusion are not worth considering.

What is the starting point of Puerh? Development of today's Puerh market faces numerous issues. The market and collectors cannot clearly consider these issues, because understanding of the starting point is confused. What is the starting point value of the growth of the Puerh market? The starting point value of Puerh is determined by the market's price expectations. Price expectations directly affect the behavior of both consumers and producers. These price expectations can be divided into several types. First is the expected price of Puerh tea. Second is the expected price of raw tea materials. Third is the expected price related to production costs. Fourth is the expected price related to sales costs. Understanding these four inclinations allows us to examine future development of the Puerh tea market from another angle.

Today the Puerh market has already entered into a stage of maturity. This so-called maturity implies that the behavior of consumers is gradually become more rational. Transaction information is transparent and open. Consumers no longer blindly engage in Puerh speculation and consumption. The Puerh market is changing from a craze sweeping China to a subset of Chinese tea. In other words, the capacity of the Chinese tea market is vast and Puerh is only one part of that market. Beginning this year, Puerh must clearly Face this issue. If we wish to develop new markets, we must engage other tea varieties in competition. All factors including price, quality, region, and flavor must be clearly differentiated if Puerh is to clear a competitive path. Likewise, this is necessary to inject new blood into the increasingly isolated Guangzhou tea market, create new sales prospects, and allow the Puerh market to undergo new restructuring. This is the current bottleneck facing the overall Puerh market as well as the Guangzhou tea market and will form a major topic of discussion over the next three years.

This year global climate conditions continue to experience instability, Many areas have hit record low temperatures, and global climate change continues to affect the production of agricultural products. This year snow fell in northern Yunnan province. Abnormal weather inevitably affects the growth cycle of plants. We can see that this year will bring unavoidable fluctuations in raw materials prices. This represents a new issue in Puerh tea and a critical moment in the development of the Puerh market. In the remainder of this article, we discuss the future development of the Puerh market based on four aspects of price expectation.

1. Puerh price expectations:

Before 2006, market expectations regarding Puerh were the result of fluctuation in the price of old teas and, in particular, teas produced before 2000. These older teas exist in limited, stable quantities, and their years of storage cannot be imitated.Ignoring the stamp teas, among 1980's Qing Bing (raw tea cakes), price increases of the 88 Qing Bing have been most intense. The rapid increase in the price of older teas led to the first major spike in expected Puerh price. Since supply was completely out of step with demand, rising prices were unavoidable. This provided major impetus for the initial-stage development of the Puerh market. However, there was just too little of this tea, and the demand of the market could not be satisfied. This gave rise to a gap in the market, which has been a long-term bottleneck in the growth of the Puerh tea market. As a consequence, the market created a new price theory regarding price expectations of old tea. That is, given that the price of old tea can increase, stored new tea will also increase in the future, since today's new tea is tomorrow's old tea.

This simple theory could not control the future development of the market, however, since price increases also require effective control of the chips in the market. Today's tea market is unlike that of the past. During the planned economy of the past, Yunnan had only three tea factories, but today there are many tea. factories in Yunnan. Previously, most old Puerh tea came from the Menghai and Xiaguan tea factories of the planned economy period. Given the high prices of their old teas, new teas from these factories inevitably enjoy high price expectations. The price expectations for these brands formed the foundation of the new market and provided the conditions for its rapid growth, adding a new aspect to the Puerh tea supply. When speculative investment was added to this mix, rapid fluctuations in new tea prices became the norm and the market gradually entered a phase of frenzied buying.

At the time, both buyer and sellers were able to profit from the fluctuations. They came to recognize labels but not tea and to recognize price but not quality. As the prices of the tea from these old factories rose, demand continuously grew and it became difficult to obtain these name brand teas. This allowed for the growth of second-line labels, and significant capital began to flow to these lower-priced second-line factories.

Abnormal demand and frenzied hoarding caused the price of raw Yunnan tea materials to reach new highs. As tea turned to gold, the market marched toward its peak. When the price of first-line factories teas fell, the market's price theory crumbled. Artificial demand fled the market as investors suffered losses, causing the Puerh market to rapidly decline. A severe blow was dealt to confidence in the market. The loss of confidence directly influenced the behavior of consumers. Numerous consumers lost substantial sums and were unable to reconcile their earlier enthusiasm. Price guarantees of the past were nothing but empty promises. The earlier saying that Puerh is a better investment than ered that what they were storing was merely tea, and not gold, Puerh speculation reached its end.

Having reached 2011, we now possess sufficient historical depth to examine the cause of the drop in Puerh prices. Many believe frenzied speculation was the primary cause of the decline in prices, but looking back today I believe two factors caused the Puerh market to collapse:

The first factor was the excessive difference in price between finished tea products and raw materials. This difference meant that much of the price paid by consumers went to the profits and the name brand of the factory. With prices unsupported at a fundamental level and large quantities of low-quality, cheap raw materials used in production, confidence in the market collapsed.

The second factor is the fact that the uniqueness of the products could not support such a large increase in prices. Price expectations for new tea were built on the foundation of the prices of old tea. New tea will become old teas in the future, and, to a certain extent, market demand is continuously increasing. New Puerh does not age overnight. Prices for new tea were already approaching those of old tea, though, which ran contrary to the pricing theory at the time and made the market collapse predictable. That the current price of pre-2005 teas is close to the list price in 2007 provides some of the clearest evidence of this cause of the price decline. The market entered a deep readjustment, and first-line factory prices also experienced a large-scale correction. Today's market has under-gone large-scale changes, as numerous factories carry out strategic readjustment to correct errors during those years. Tea factories began to guide route allocation and large numbers of new agents and factory stores were created. This illustrates the fact that Puerh's greatest challenge is not in production, but in sales. Puerh's greatest charm comes after it has been stored, but storing Puerh presents substantial difficulty. To a certain extent, encouraging storage of Puerh creates obstacles for the future market. We are consuming the future. If consumers cannot be encouraged to drink Puerh rather than store it by tea caddy, prospects for the future Puerh market are limited. The tea factories created the factory stores to strengthen the foundation of the Puerh market. I believe that ripe tea is a breakthrough point, but the factory stores have weakened the initiative of factory agents, returning it to the tea factories along with associated profit. However, the increasingly decentralized supply flow may also cause prices to become increasingly transparent, contributing to today's weak profits.

Given the low predictability of new tea prices, the market has gradually moved toward short-term operations. Rising and falling prices have become a dual-edged sword. Consequently, the price expectations of the market require adjustment. I believe that future price expectations will return to the situation before 2006. The year and quality of Puerh will gradually be emphasized. This year the trends and strength of pre-2005 teas will bear this out. Teas produced between 2000 and 2005 have already reached maturity. Quantities are relatively small and quality is varied. Both first-line and second-line factory tea products can be effectively distinguished from new teas. Only products with these features can compete with other types of teas during the course of developing the future market. Only aged teas possess the qualities that make Puerh unique. That trait of improving with age is the unique selling point of Puerh that can help it carve a path through the competition. During the next three years, this will be a major topic in the Guangdong market. That is, how to promote long-stored teas in other regions. This will also form the foundation for new tea prices. If price expectations take shape, the new shape of the market will unfold as profit and price fluctuations for new tea weaken. If pre-2005 tea products are unable to take this step and cannot provide space for new tea price fluctuation, demand for new tea will continuously decline. Consequently, the trend to this new price expectation is unavoidable and will also be a major topic over the next three years.

2. Raw material price expectations

Today Puerh tea is gradually moving from price expectations based on products to price expectations based on raw materials. This is primarily due to the rise in famous mountain teas. The rise to prominence of Banzhang, Yiwu, and other famous mountains has created a new division in the Puerh market - Famous mountains teas are characterized by their exceptional ecologies, high-quality raw materials, and limited production quantities. These qualities have helped cause a wave of investment in private production famous mountain teas. The gradual increase in understanding of famous mountain teas has helped drive Puerh prices to new heights. This has also built a different foundation for price expectations of mountain teas compared to factory teas. The price foundation of famous mountain tea is based on the fact that raw material prices are continuously increasing. Thus there is no need to take advantage of market speculation, and in fact the small quantities of famous mountain tea make it poorly suited to speculation. Consequently, price expectations for mountain teas depend on price expectation for raw materials. Basic price fluctuations for raw materials can stimulate the buying behavior of consumers. Prior to 2005, numerous people in the tea business produced mountain teas. Today these teas have begun to reach maturity, but today's extremely high raw material prices have created a large price gap. I believe that the next three years will see rapid growth of famous mountain teas as they become the main force in the Puerh market. These teas have abundant advantages and high quality, giving them strong price support. Adding the benefit of age, and the price expectations for these mountain teas gradually takes shape, forming a new domain separate from large factory teas. We can expect this in the future.

Due to climate change and inflationary factors,I believe the future of plantation tea should also not be underestimated. The price of Yunnan plantation tea is relatively low. Based on the nearly 30% increase in prices this year, prices can be expected to continue to increase further in the future. Most importantly, the rise in plantation tea prices is not due to speculation. Rather it is rational inflation due to loosening of monetary policies, which is actually more frightening. The continuous increase in raw materials prices does not imply that sales prices can increase at the same level. End-sales development requires stable prices, and so future factory prices will gradually be restricted by raw material prices. The price difference between factory teas and raw materials will no longer be so substantial. This is a short-term phenomenon, however, as raw materials continuously increase and attract buyers. Long-term development is good for the markets and the next three years will serve to establish a new order for large-factory products.

3. Production cost price expectations

As materials, labor, and other costs continuously increase, expected costs over the next three years will be much higher than those of several years back. Raw materials prices continue to increase, and profit margins are increasingly limited. As a result, cost is becoming an extremely important concern. It is also a major factor influencing price.

4. Sales cost price expectations

Factories continue to open stores, which illustrates the trend of directly selling to consumers and no longer depending on speculators. This gives rise to another new issue, however. That is, the sales costs of these factory stores are much higher than those of the wholesale tea market. The sales volume of these stores is also much less than that of the wholesale market, so the cost share of each item of tea is higher. The current environment of minimal profits for new teas makes running these stores difficult. Unless the products sold or the methods change, these factory stores will have to undergo adjustment in the future. These sales casts will also affect prices and are another factor to watch in the future.

Based on our starting point perspective, the price expectation structure of future Puerh tea will dictate the development directions of the Puerh tea market and affect the behavior of producers. If Puerh can return to its traditional values system that integrates with changes in raw materials prices next year's market development will be worth anticipating, We may see the unfolding of a new frontier in Puerh based on new values.