The price of tea is neither determined by KTDA nor any other government agency.
As in most businesses, pricing is solely a function of the market.
Factors that determine price at the auction include demand and supply, currency exchange rate, political stability in key export markets, and the unique attributes of individual teas.
A few weeks ago I spent valuable time with a group of smallholder tea farmers in Kisii County. It was evident that their understanding of the industry was superb.
What I found troubling was that the same farmers had to shift through loads of alternative information; most of it in the form of rumours, innuendos and half-truths.
The sources were varied — from fellow farmers to aspiring factory company directors, aspiring MCAs and all manner of people with interest in the industry.
There are three critical areas where the smallholder tea industry suffers the greatest amount of disinformation. These are: what constitutes a kilo of tea in the market, pricing, and the role of the Kenya Tea Development Authority (KTDA) in the value chain.
Let me break this down: One kilo of green leaf delivered by a farmer to a tea collection centre is not the same as a kilo of made tea sold at the Mombasa auction.
During processing, four kilos of green leaf are required to a kilo of made tea. If a kilo of made tea, for instance, is sold at Sh200 at the action then the value of a kilo of green leaf is Sh50. What is due to the farmer for a kilo of green leaf will be Sh50 less the cost of production and transport.
Pricing is perhaps the most sensitive issue. Prominent politicians and other interest groups have in the past caused a furor by alleging discrimination where variations exist between earnings of factories in one region compared to another.
Critics have been quick to read politics and favouritism in such instances causing despondency and confusion among farmers.
The price of tea is neither determined by KTDA nor any other government agency. As in most businesses, pricing is solely a function of the market.
Factors that determine price at the auction include demand and supply, currency exchange rate, political stability in key export markets, and the unique attributes of individual teas. When the market is flooded with tea demand is bound to suffer and with it price.
Currency exchange rate is significant here because tea sales are usually denominated in foreign currency, primarily the US dollar. When the value of the shilling depreciates against the dollar or the value of the dollar appreciates farmers earn more from each kilo.
The reverse happens when the shilling appreciates against the dollar or the dollar depreciates against the shilling. But whereas a weak shilling is good for exporters, it is bad news for importers.
In our context, tea farmers do not just export made tea, they also import inputs such as fertiliser and factory machinery. A stable currency is therefore the best bet for the industry.
Political stability is another factor of pricing and thankfully, it is not an everyday occurrence. Kenyans will recall how the industry suffered immensely due to political instability in Egypt — one of the top three importers of Kenya’s tea a few years ago.
On the other hand, unique attributes of tea are conferred by the soil type and difference in climatic conditions. Buyers are often prepared to pay more for teas with a particular attribute.
Teas from Meru, Embu, Nyeri, Kirinyaga, Murang’a, Kiambu, Kisii, Kericho, Vihiga, Nandi and Bomet are all different in terms of their individual attributes.
The third and final area of disinformation is the role of KTDA in the tea value chain. Some have argued that KTDA is not needed or that it should be split.
Arguments such as free market economics and individual factories being able to access better markets for their teas have been advanced. Nothing could be further from the truth.
Most tea farmers own so small farms that they cannot survive without the economies of scale that they enjoy through KTDA. Besides, few organisations understand the smallholder tea sector and the tea value chain as deeply as KTDA does.
The experience, knowledge and networks that the agency has acquired over the past 50 years are irreplaceable.
More important, KTDA is owned by the farmers themselves through their factories and the profits it makes are paid back to them as dividend and bonus.
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Note: The results are not exact but very close to the actual.
