Prices at tea auctions crash in meltdown

The tea industry has entered a meltdown after auction prices dropped by nearly 60 per cent since September.

Industry players especially fear monthly payments to small-scale farmers might be drastically whittled down as a result and the rest of the economy seriously damaged.

Over the past three weeks, an unprecedented 35 per cent of tea offered at the weekly auction has been withdrawn as the global financial meltdown has ravaged consumer demand.

Tea is Kenya’s top currency earner — after tourism lost its brief leadership — and the implications are dire for both poverty eradication and forex inflows.

Tea industry players are seeking an urgent meeting with the government which would hopefully culminate in a massive mopping up of the black teas by the state.

Sri Lanka has taken this route after currencies of major markets, including Russia and Middle East, slipped against the dollar. The greenback has strengthened against all currencies as frightened investors rush to lock money in “safe” long-term US Treasury bonds.

Tea Board chief executive Sicily Kariuki confirmed to Sunday Nation the industry was “requisitioning” an urgent meeting with the Agriculture minister this week.

Pakistan, a major market for Kenya, has slipped into financial doldrums and has sought intervention of the International Monetary Fund as it battles to contain a security threat posed by militant Islamists.

Tea orders are taking a hard knock as the country teeters on the brink of national default.

A letter in our possession shows that the tea industry umbrella body, East African Tea Trade Association (EATTA), raised the alarm last Monday ahead of the regular Tuesday/Wednesday weekly auctions at Mombasa.

“A major crisis is looming in the horizon with the plunge in tea prices at the auction, accompanied by unprecedented volumes withdrawn at the recent auction sales,” said EATTA in the distress letter to Agriculture PS Dr Romano Kiome signed by association administrative secretary Hadija Shakombo.

Concern gathered momentum following a slide of the mean price from $2.68 per kilo peak on September 1 and 2 auctions to $1.79 in auctions held over a week ago. This means more than a halving of farmers’ earnings. Further, at both auctions some 35.23 per cent of the tea stacking up to 40,497 packages attracted no buyers.

“This is a historical high since the establishment of the Mombasa Auction,” said EATTA. It heralds shock for farmers producing in this flush season as institutions like Kenya Tea Development Agency might not make enough to meet regular monthly payments for long.

There has been a surge in repeat (reprinted) volumes at the auctions since mid-September as buyers stay away. The total re-offering has topped 175,853 packages, compared to 107,000 over the same period last year.

Fresh teas, however, have been moderate in supply at 107,000 packages, which is roughly the same as last year. Fears of declining quality loom large.

If the trend of a 53 per cent price decline is maintained for the next few months, some rural economies are bound to collapse.

That is before taking into account the fact that production is down on last year. With the dollar constantly threatening to breach the Sh80 exchange barrier, the tea industry decline augurs badly for importers who have to factor in a weak shilling.

KTDA is understood to be frantically seeking the intervention of the TBK. The small-scale farmer agency runs dozens of factories, which constitute much of the country’s rural industrialisation. It markets over 60 per cent of Kenyan tea.

The pain is not confined to Nairobi, and it will be felt in Blantyre, Malawi and Colombo in Sri Lanka in equal measures.

Mombasa Tea Auction is the second largest after Colombo serving the Great Lakes region, Malawi, Zambia, Madagascar, Zimbabwe and Mozambique.

This means a multinational intervention, perhaps incorporating donors, may be required. Kenya is the largest supplier at the institution that has grown in global importance after the London tea auctioned collapsed in 1998.

For tea brokers, the dwindling commissions come as the Dubai Tea Trading Centre threatens to eat into their shrinking pie. KTDA sells 75 per cent of its tea at Mombasa, 15 per cent directly, seven per cent through Ketepa and the balance at the factories.

The tea crisis has been brewing as Kenya and new growers like Vietnam increased production to prick the price bubble in August. Last year Kenya produced 369 million kilos of processed tea worth Sh43 billion.

In 2008, the country is expected to produce a lower 335 million kilos due to drought. But well before that Pakistan, which takes the largest chunk of 28 per cent, has bought smaller volumes after it went into a free trade arrangement with Sri Lanka under the South Asian Association for Regional Cooperation (SAARC).

Pakistan is followed by the UK and Egypt; all buyer countries’ currencies have slipped against the dollar and their economies indicate lower growth.

Attempts to have Kenya get into a similar free trade arrangement have been scuttled by Tanzania, which despite producing only a small amount of rice lives in fear of Pakistani rice imports.

Sri Lanka has acted quickly by buying 20 per cent of the tea at their auction and provided credit to buyers to stem cash flow problems at the factory level.

President Mahinda Rajapaksa convened a stakeholders’ meeting after the prices declined precipitously. But the slump was not entirely unexpected. Food and Agriculture Organisation economists have been warning the $2.15 a kilo price was not sustainable and suggested only prices under $2 were.

“As a short-term solution we are advising cultivators to pluck only the good leaves and for factories to manufacture only good grades of tea,” Tea Board chairman Lalith Hettiarachchi said a month ago.

KTDA has been trying to enhance this rule with a huge furore triggered by insistence on plucking two leaves and a bud.

For KTDA, the problem comes when it is trying to employ alternative energy sources to cut its operation costs.

For Kenya, the loss of foreign exchange is likely to affect imports negatively even as global demand for commodities fall.