Direct sale of tea to international buyers has plucked off 30 per cent of the total export volume, sparking fears that it will undermine pricing at the centralised Mombasa tea auction.
Traditionally, only a fifth of tea exports is bought directly from farmers, as buyers seek top-ups for blending varieties from the auction.
The East Africa Tea Trade Association (EATTA) said increased direct transactions have reduced the number of buyers at the auction, leading to lower traded volumes.
Peter Kimanga, the Eatta chairman, said only 30 of the 70 registered exporters were active at the auction while about 18 per cent of tea remained unsold on a weekly basis despite reduced offers following the withdrawal of Tanzania and Malawi producers.
Mr Kimanga said stringent requirements for buyers and brokers were pushing them to look for deals outside the auction.
“Besides being asked to deposit Sh10 million, set up warehouses and pay taxes, buyers’ licences have to be renewed annually.
“This is prohibitive, for what happens should the government decide not to renew the licence? The investment goes to waste,” said Mr Kimanga.
Tea-producing countries are also pulling out of Mombasa in order to exploit the benefits of Everything But Arms Agreement (EBA) trade agreement which they have been missing out on due to reliance on the Mombasa auction.
EBA trade agreement provides duty and quota-free access for products exported to the European Union from countries on the UN Least Developed Countries list. Kenya does not enjoy the preferential agreement because it appears on the LDC list.
“If the number of buyers continues to fall at the auction, the reduced competition will lead to a price crash,” he said, blaming the exit of Malawi and Tanzania on tariff barriers.
Farmers would suffer from the lack of a price discovery mechanism, leading to poor earnings as happened in China.
The Chinese green tea industry is characterised by erratic prices because of speculation arising from the lack of a clear marketing structure. Unlike Kenya, Sri Lanka and India, China does not have an auction centre.
Tea auction systems are globally considered the best avenue for marketing.
There are 11 tea auctions centres in the world but Mombasa, Colombo in Sri Lanka and Calcutta in India are the market movers, handling half of the tea sold through auction.
Although direct tea sales are pegged on auction prices, farmers are attracted to individual contracts because the cost of storage, transport costs and brokers’ fee is borne by the buyer.
Mr Kimanga said a ceiling should be put on direct sales to protect the auction which handles trades valued at Sh12 billion every week.
Tea is the country’s number one foreign exchange earner, having brought in Sh97 billion last year compared to Sh73 billion in 2009.
It is closely followed by tourism, which earned Sh74 billion last year.
Edwin Kinara, a tea auction expert in Mombasa, said Kenya faced lower earnings from imported tea sold through the auction because of the East African Community tariffs.
“These threats may lead to the government being reluctant to rein in rising volumes sold through direct sales hence declining the role for the Mombasa Tea Auction system,” Mr Kinara said.
Dubai Tea Trade Centre (DTTC) has also been increasing its activity in the African tea market, after various players like Unilever, James Finlay and Kenya Tea Trade Agency (KTDA) signed a trade pact with it.
KTDA, the marketing agent for about 500,000 small scale farmers said it still supported the Mombasa auction but the interests of growers affiliated to it come first.