Thursday, June 21, 2018

The pitfalls of discussing puerh prices

Top of the tong green mark puerh from the early 1990s
Early 1990s green mark raw puerh
If you've studied economics or business strategy, you'll know that there are 2 basic strategies for any product:
- Number 1: economies of scale. That's where you try to have a very standardized product and the main players are those few companies that are able to cut the cost the most and achieve the lowest price. The best example in the tea industry is Lipton with its tea bags. It always kind of tastes the same and this is achieved by mixing leaves from different origins. This was also, due to ideology, the strategy of the CNNP in Yunnan with regards to puerh until 1975: they made only 3 puerh cakes: a green, a red and a yellow mark. Right now, this is still the strategy for mass produced plantation puerh.

- Number 2: Differentiation or niche marketing. This strategy doesn't emphasize the lowest cost, but superior quality. A good example of such a market is top wines: every estate strives for a good reputation, quality productions, limited editions... This strategy works well for teas that see their quality improve depending on which cultivar is used, where it's planted, how the trees are cared for, when it's harvested, how it's processed... It also works for Gushu, old arbor puerh, which is made from trees that are over 100 years old. Such puerh only represents 4% of the total puerh production. Thanks to its limited amount and special qualities that vary from one mountain to another, old arbor puerh is a good fit for differentiation.

We can see this strategy implemented since the liberalization of the tea market in China in early 2000. When the first Taiwanese merchants went to Yunnan, they mostly pressed cakes simply called Yiwu (see my 2003 spring Yiwu wild cake, for instance).  Nowadays, the producers are very precise and will tell you if the leaves come from Mahei, Guafengzhai, Bohetang, Wangongdingjiazhai... Each village has different market prices for their gushu (古树puerh. This article has a detailed list of maocha prices for spring 2017 and you can see that prices for loose gushu puerh from the 6 famous mountains vary from 1,200 to 15,000 RMB (highest in Laobanzhang).
Pitfall number 1: The market for regular plantation puerh is very different from the market for gushu puerh. Increased demand for plantation puerh can be met by increasing supply with new plantations within a few years. That's why price increases are more gentle and simply reflect the increasing labor costs in Yunnan. For old arbor puerh, increased demand leads to higher prices, because production is difficult to increase without harming quality. The dynamics of these 2 puerh categories are very different. So, while it makes sense to discuss about plantation puerh prices in general, it makes little sense to discuss prices of gushu puerh without discussing their quality AT THE SAME TIME. In any case, there's less and less one market and one price for puerh, but many different markets and prices for different quality levels of puerh.
Pitfall number 2: High prices don't necessarily mean a puerh is gushu or of superior quality. The higher the price, the more careful and demanding you should be about quality. Tasting (a sample) yourself is the best (and only?) way to participate meaningfully in the price conversation.

Pitfall number 3: For gushu, a low price doesn't necessarily mean a low quality, but it could mean that it's not a gushu puerh! If we take 1200 RMB/kg the lowest gushu maocha price from Yiwu in 2017, this means a cost of 23 cents per gram for the loose tea material paid to the farmer. Let's double this cost to roughly include the pressing, packaging and domestic delivery costs and we obtain 46 cents per gram of cost. Let's assume then that the markup factor is 2 and the minimum price for a gushu cake from Yiwu is 92 cents per gram in 2017. (That price should be roughly tenfold for Laobanzhang or Bingdao!)
Pitfall number 4: You can't go back in time. Low prices for gushu puerh are a thing of the past. The Chinese economy creates an affluent upper class that wants to enjoy the best teas that China produces. It would take a third world war to make China as poor as it was 20 years ago when puerh was cheap, and in that case we'd all have other priorities than finding good puerh! 15% yearly price increases (or more) for gushu puerh are the new normal. Such increases have been called unsustainable every year in the last 10 years. Negative adjustments are always possible, but are not likely to be long lasting given the specific dynamics of the gushu puerh market. Instead of focusing your attention on the long gone prices of the past, understand where the prices are now, where they are headed and don't wait to find the puerhs that best fit your taste and budget.
Pitfall number 5: 20 years aged puerh and more is even more limited than fresh gushu puerh! Expect prices to increase even higher and faster. The reason is simple: every year, there's a new harvest of gushu puerh which increases supply, but in the aged puerh market, for a particular year, there's no new supply, only a dwindling amount of puerh cakes as collectors drink what they have in their inventory. At the end of 2017, the price of a 88 qingbing (aka 7452 from 1988 or little green mark) is 10,000 USD at auctions in China. In 2009, it was around 2,000 USD. (This is a 20% yearly increase).

The 20 years cut off for aged puerh is meant to separate the CNNP period of very standardized, mixed leaves puerh from the modern era when private factories have taken all kinds of approaches. The appeal of older CNNP era puerhs is that they were made almost exclusively of gushu material, since it was cheaper to harvest existing old trees than planting new ones when demand was low. New puerh plantations started in the late 1970s and their proportion has grown progressively over time. This is another reason why older puerhs command higher prices. It's not just that they are older, but that their material has a higher gushu proportion. And therefore their quality is also often better (all other things being equal). This quality level is relatively homogeneous and easy to assess for puerhs that are over 20 years old. For puerhs that are less than 20 years old, all bets are off. Big private factories have used economies of scale and their cakes are made of pure plantation tea. Product differentiation with gushu quality only concerns a very low percentage of puerhs less than 20 years of age. And remember that good teas tend to sell out first...
The end of this article is near and I should write a few words about the puerh I've recently added to my selection and that you can see pictured in this article. It is an early 1990s Luyin (green mark/qingbing/7542) raw puerh cake from the CNNP and made by the Menghai Tea Factory (its neifei mentions the CNNP). At the top of this article, you can see a picture of one of the cakes I bought from a Taiwanese collector. This is the cake that was at top of the stack in the tong. From this wear and tear we can see the slow impact of time. The other cakes are in much better shape as you can see nearby, but they have the same scent of precious wood incense.
Early 1990s Lu Yin
What can you tell from the view of this cake? First, we look at the back of the cake, because the front is often made up with the nicest looking leaves. The back is closer to what's in the cake. We can see the that the color of the leaves varies a lot. This is a good sign, because it means the cake wasn't subjected to artificial humidity that would have evenly fermented all its leaves black or red. There's a good proportion of buds and many look big (= gushu). Besides, the color of the buds is a good tool to estimate the age of the cake. Compared to my 1997 and 1999 green mark cakes, the color of the buds is darker here and points to an older production, in the early 1990s (the exact information was lost). We can also see the typical cloths marks left during the pressing of the cake. 

It's pricey compared to most puerhs available on the net, but cheap compared to actual market prices in China.It comes close to the famous 88 qingbing and even to the 1950s Lüyin! I've made it available as a 8 gram sample so that you can form your own judgement about the quality of such an aged sheng puerh. If you ask me, it's wonderful!

Acknowledgement and thanks: this article was inspired by following posts from TeaDB: 

Lew Perin from Babelcarp has reacted to my article with 2 good points. First, that plantation puerh has become better. I agree and see this as the positive impact of higher prices, which allow tea farmers to pursue better quality instead of the lowest costs (= the differentiation strategy). But if you're looking for top quality, it's still gushu that have the best potential for greatness. Second, there is some elasticity in gushu puerh supply. As prices rise, tea makers have more incentives to harvest leaves from more remote areas. A good example of this trend is my 2017 spring top wild raw puerh cake. But such productions are always quite confidential and the limited amounts they produce don't have a significant impact on the market.

No comments: