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Sunday 9 June 2013

Pu Erh Tea 普洱茶 at the front line battle against zero interest rate policies

I am pleased to report that despite the ubiquitous Starbucks, Gloria Jeans Cafe, Wild Bean Cafe, Café Nero, Coffee Republic, The Coffee Bean, Pacific Coffee and countless other mom and pops that line our high streets, CDBs and petrol stations; tea, according to Wikipedia, remains the second most popular, after water. 

Last time I checked the statistics, it remains so, but before we read the tea leaves we will run through the maths just to make sure. 

In 2012 total coffee production was 144,646,000 bags.  Each bag weighs 60 kilos. If I got all my zeros in order that equals to just under 8.7 trillion grams.  Annual coffee consumption is about 95% of annual production or 8.2 trillion grams.  Yes demand and supply is that tight.  So do not complain the high price of your cup of coffee.

As an aside consider this: The total bailout package for the TBTF banks was about US$13 trillion dollars.  What? You thought it was only US$700 billion TARP (Trouble Asset Relief Program) that Hank Paulson, the ex-US Treasury Secretary and ex-Goldman Sachs dished out?  You seriously need to switch off CNBC and MSN and Bloomberg and go and get your news somewhere else.

I digress, a good cup of coffee requires 15-17 grams depending on strength, the honesty of the proprietor and company policy.  I know this because I used to run an Italian restaurant in Dongguan, China.

Then you have Nescafe, through such miraculous process mean you only need about a teaspoon which incidentally weighs about 8 grams.  So assuming 40% of all the world's production are used to make instant coffee of dubious quality (Ipoh White Coffee - you know who you are).  That would be 3.3 trillion grams about 400 billion cups of coffee. 

For good old Italian style coffee, assuming we meet half way, that would be 16 grams per cup of coffee or 300 billion cups.

Taking the two together gets you 700 billion cups.  Assuming wastage in production, spoilt coffee beans, stale coffee and others I have not thought about gets you a nice round sum figure of 600 billion cups.  Why such a high waste rate?  Don't ask me, coffee exposed to air becomes oxidized and turn sour.  It is also wasted by big catering firms making coffee in bulk a lot of it gets thrown away.   There are now currently about 7.2 billion humans on this planet.  Taking out children and the penniless masses probably gives you a coffee drinking population of about 1 billion consuming about 1.5 cups a day.

China produces about 1.5 million tonnes of tea or about 33% of global production.  So global production is about 4.5 trillion grams.  Assuming consumption rate similar to coffee plus wastage gives annual consumption of 4.1 trillion grams. Now a good cup of tea only takes about 3 grams but for argument sake we make it to 4 grams. 

That is equivalent to 1,000 billion cups v 600 billion.  Whew! The maths worked.  Honestly if you have been to B-school and you went to look for a job at Accenture or McKinsey they'd have given you a case study like this, you'd be wide off the mark.  But hey, it sounds impressive does it not?

An amazing fact:

All the world's thousands of tea blends come from only one plant - Camellia Sinensis.  A tropical and subtropical plant that is grown only in abundance in a few countries - China, Sri Lanka, India, Taiwan and Japan.  Of course it is said that every Camellia Sinensis had its roots in China; word has it that the British loved tea so much that they stole from China and transplanted it in India and Sri Lanka.   

There many different blends of tea 茶 such as Tie Guan Yin 铁观音, White Tea 白茶, Red Tea 红茶, Oolong 乌龙茶, Hunan Black Tea 黑茶, Long Jing 龙井茶 and Green Tea 绿茶.  The subject of our discussion is Pu-Erh tea 普洱茶 which has about 400 varieties split into two main categories - Raw Pu-Erh 生茶 and Ripe Pu-Erh 熟茶.

Pu-Erh tea comes from only one place - Xishuangbanna in Yunnan Province in China.  To learn more you can Wikipedia it.  What is not so known, is the fact that to be considered proper Pu-Erh tea, it should come from tea trees (not shrubs) that should be at least 300 years old and the really good ones over a 1,000 years old.  Ancient trees 古树茶.  They are not neat little bushes that you so often see in pictures (e.g. Cameron Highlands or Darjeeling).  Somehow Western media had confused picturesque neatness with quality.  They are wild, majestic and imposing trees.

Pu-Erh are usually harvested twice a year - spring and autumn time mainly by the Dai ethnic minority. The best ones are from the spring harvest. If you are after a more mellow and gentle flavor, the needles (unfurled tea leaves) are the best.  Raw Pu-Erh is drank for its subtleties (taste) and ripe Pu-Erh is drank for its 养胃 properties.   No direct translation but basically Chinese medicine has it that a lot of health problems originate from the stomach.  Given Chinese people's penchant for food this is not a far fetched idea.  Ripe Pu-Erh is meant to be good for the stomach.

Like wine from different regions in France, the best Pu-Erh comes from six mountain regions renowned for their near perfect climate and environment, which not only provides for excellent growing conditions but also produce unique taste profiles.  Within these six mountain regions, there are only a handful of 1000 year old trees capable of producing the best of the best Pu-Erh.  For example raw Pu-Erh from these areas such as Jing Mai 景迈, Bing Dao 冰岛, Xi Gui 惜归 can command not less than RMB 5000 per 500g.

Why this price?  One word: Scarcity

You cannot buy them even if you have the money.  You need to know the right people. 
There are countless tales of people buying fakes (i.e. Pu-Erh but not from those six mountain regions and age) because only tea masters (certified by the Yunnan provincial government) and those that have tried the genuine article can attest to its unique flavor.

Between 2008 - 2009 whilst the world was pre-occupied with the global financial crisis, tea investors were grappling with a crisis of their own - the bursting of the Pu-Erh tea bubble.  Just like toxic assets with fancy names such as CDO, CDO squared, CDO cubed, ABS, CDS went south; tea investors also piled in thinking they were high quality Pu-Erh which turned out to be no more than leaves plucked from young trees - some even came from Fujian province masquerading as Pu-Erh. 

The crash that followed wiped out a not few greedy investors.  I have heard one lady who spent 20 years building a tea empire worth RMB 10 million only to lose it all when prices came tumbling down and the tea she held was of suspicious quality.  She is now working for RMB 2,000 per month as a tea saleswoman.

The other fact about Pu-Erh is that it gets better with age, Raw Pu-Erh is best drank after seven years of natural fermentation whilst ripe Pu-Erh three to four years.  Many rich Guangdong-ers particularly Dongguan-ers buy up all the annual supply, and then drip feed it to the market.  In this way they provide finance to the manufacturers and tea-pickers.  By the way, Guangdong's climate is ideal for ageing Pu-Erh.  It has the right temperature and moisture.

The general guide is the older the tea the better.  Be careful when buying - garbage in garbage out.  Unlike coffee beans where your challenge is tell whether it is a Robusta or Arabica, tea is next to impossible to define as to quality, age and origin.  Tea is more wine than coffee in this respect.

If you want to buy it must be through a reputable supplier which you know really well.  Tea, is indeed a culture, you first get to know the purveyor and the purveyor's friends, acquaintances, business associates and family members and then finally if you are on the same wavelength you too will be accepted into the inner circle.  Only then should you tip toe in with a box (42 pieces of tea cakes or beng cha to start) to start your collection. 

This is why one of the great past times of Dongguan denizens is a visit to one of the many shops in tea cities.  There are about 8 tea wholesale cities in Dongguan alone.  In China industry players number 1,000s not hundreds.  The biggest wholesale center is in Guangzhou Fang Cun.  It takes three days to complete a visit.  Think of your weekends drinking tea and meeting lots of people!  The most fun part of it is that it is free!  Strong bladder a key requirement.

Most people start with Oolong, Long Jin, Tie Guan Yin, Taiwan tea before - I am not kidding - settling down to Pu-Erh, it is known as the king of teas for a reason.

Lately, many with short term memories and courtesy of the People's Bank of China printing money (see my previous article) and property controls discouraging speculation - sorry storing wealth in real estate, investors have been piling into Pu-Erh tea again.  See above article.  DeJa Vu?  Not really, US house prices apparently have recouped most of their losses courtesy of Fed largesse.

The difference here is this, Pu-Erh is a scarce commodity but in real estate there are no limitations on how many or how high you can build.  Of course land supply in certain cities are fixed which is a different consideration.

There is no telling if it will develop into a full blown bubble again (if history is any guide - in will) but real-estate investments might give you stomach ulcers whereas you can drink the damn tea - its good for you.  Pu-Erh's health benefits are clear.  It is an antioxidant, is good for your stomach and also helps gets rid of bad cholesterol in your body.  You can make friends too with tea.

If you'd like to know more about Pu-Erh or you need some help to buy some for posterity, please e-mail me.

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