Revealed: How tea agency colludes with brokers to con small farmers

Players at the Mombasa Tea Auction collude to fix prices and deny small-scale farmers their deserved earnings, effectively negating the proposition that the current six-year record lows are driven by market forces, a new report says.

The Tea Industry Status Report May 2014, prepared by the industry regulator, Tea Board of Kenya, accuses various players, chief among them the Kenya Tea Development Agency (KTDA), of manipulating the price of the highest tea grade, PF1, which is mainly produced by small-scale farmers. The grade has consistently sold at low prices or at the same price with inferior grades at the weekly auction.

The report also blames direct sales outside auction venues to some big marketers which create a huge price difference while giving the impression that there is excess tea in the market.

“The current low prices at the auction are precipitated by some unorthodox practices by KTDA, which controls over 65 per cent of the volumes dealt in at the auction. This is done in collusion with major brokers, warehouses and traders. The perpetrators continually divert attention from the real issues by citing the ad-valorem levy,” the report says.

The ad-valorem levy is a tax charged and collected by the Tea Board, at one per cent of the export cost, to facilitate research, marketing and infrastructure.

Price manipulation is said to have been rampant during the months of March and April 2014. Smallholder farmers are normally paid the hammer price, with zero benefits from this venture. Prices have continued to decline, not because of poor quality but owing to poor trade practices.

Tea auctioned on March 1, 2014 and exported on March 31 lost $0.63 (Sh54) since it was offered at $2.72 (Sh233) against an auction price of $2.09 (Sh180). This is equivalent to Sh54.18 per kilo of made tea (four kilos of green leaf), which translates to Sh14 per kilo of green leaf. The loss suffered by the farmer in the process is enough to pay a first payment, popularly known as a “mini bonus”.

“There is evidence that KTDA, at times, sells tea to Chai Trading at a lower price than the offered price. For example, where the offered price is $2.61 (Sh224), the auction price is much lower at $2.05 (Sh176) per kilo, yet destination of the market is not indicated,” the report says.

“Trends indicate evidence of manipulation. For instance, tea that was auctioned on September 12, 2013 is exported five months later on February 7, 2014. Where it would have attracted Sh224 per kilo, it gets auctioned at Sh176.”

Selling tea outside auction venues to some big marketers is also a common practice by the KTDA’s Chai Trading subsidiary. Known as the post-auction/private sale of withdrawn teas, some organised private arrangements are made to buy high quality teas at below auction prices.

Chai also buys teas directly from factories at lower prices than the auction prices, and imports cheap, low quality teas from Asia which it blends with the Kenyan teas to re-export as Kenyan brands.

This, in itself, reduces the overall commodity price, creates a huge price difference and implies that there is excess tea in the market.

“This has seen traders/brokers refrain from quoting during auctions on Tuesdays, but make private arrangements to buy high quality teas afterwards at below auction prices.”

PF1 grades are also deliberately disadvantaged by the buying behaviour of the multinationals, who are the major buyers, at the auction. These include Unilever, James Finlay, Van Rees, Stansand, Juja Coffee, Cofftea and Eastern Produce of Kenya. The report notes that most buyers of Kenyan teas are multinationals who have interests in value addition in both traditional and emerging market destinations.

Unilever, James Finlay, Gold Crown, on behalf of Global Tea, Imperial Tea Exporters and Gokal Beverages are also cited. Frequent tea brokers in the post-auction sale volumes include Venus Tea Brokers, Combrok, Bicorn Exim and Tea Brokers East Africa.

Multinationals have also been blamed for buying their own teas (PF1) at higher prices than quoted prices despite the fact that international teas are of lower quality than local tea. Consequently, Kenyan teas are losing traditional markets such as the UK and Egypt.

SITUATION CRITICAL

Over the past year, when tea prices have been at their lowest, the amounts of unsold teas were kept at an average of 11 per cent of the volume offered for sale. But the situation has worsened this year with each successive auction having 16 to 20 per cent of unsold teas of the volume that is offered. This has resulted in a price convergence of all the four grades -- PF1, PD, D1 and BP1 -- an indication that the auction does not respond to free and fair market forces.

Since January, PF1 has performed worse than all the other grades, meaning farmers did not get value for their product. The situation has worsened since January to the extent that KTDA has resorted to buying its own teas in the auction, and at much lower prices. These teas are then shipped to traditional markets like Afghanistan, Egypt, Pakistan, UK and, lately, the United Arab Emirates, which buy through agents.

Some of the teas Unilever and James Finlay post to the auction are of very low quality, attracting very low prices, which knock KTDA out of competition for traditional markets. This acts as a basis to transfer prices to aid exportation of their high quality tea at disguised market prices. It also helps the same buyers to access KTDA teas at a lower price, especially in post-auction sales.