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How tea reforms raised earnings for producers

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Agriculture Cabinet Secretary Peter Munya. PHOTO | EVANS HABIL | NMG

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Summary

  • The reserve price for tea set by the government last year helped the value of the beverage to remain relatively high within the last quarter of the year, boosting the earnings of small-scale farmers and multinational firms.
  • Before August last year, the price of tea had dipped to the levels that were last seen a decade ago, subjecting farmers to massive losses as the price at which they were selling their teas was below the cost of production.

The reserve price for tea set by the government last year helped the value of the beverage to remain relatively high within the last quarter of the year, boosting the earnings of small-scale farmers and multinational firms.

Before August last year, the price of tea had dipped to the levels that were last seen a decade ago, subjecting farmers to massive losses as the price at which they were selling their teas was below the cost of production.

The declining value of the beverage, which made the farmers jittery, saw the Ministry of Agriculture move in with speed to safeguard growers’ earnings in the wake of low prices at the Mombasa auction.

“The tea reforms and especially the minimum price that we set have helped to increase money in the pocket of farmers,” said Mr Munya.

The government set $2.43 (Sh275) per kilogramme as the minimum price for all teas belonging to Kenya Tea Development (KTDA) to reverse the declining price trend of the commodity.

KTDA teas account for more than 60 percent of the total beverage offered for sale at the auction and the minimum price would have an impact on all other teas that are sold through this trading platform.

For instance, multinational firms such as Kakuzi recorded an increase in tea earnings last year as a result of the minimum price.

“In Kenya, despite the continued high levels of countrywide crop previously reported, the introduction in the summer of the new tea regulations has resulted in a significant uplift to the tea prices at auction,” Kakuzi’s parent company Camellia Plc said in a report.

Mombasa auction trades KTDA teas and those from multinational companies as well. It also sells tea from 12 African countries.

Before the minimum price was set, the price per kilo of the beverage had declined to a low of $1.69 (Sh191), the lowest to have been witnessed in a decade. However, with the introduction of the reserve price, prices climbed to a high of $2.59 (Sh293) before closing the year at $2.39 (Sh271).

Though the prices have been moving up and down at the auction, they have not dropped below $2 (Sh226) in the weekly sales.

The oscillating prices were attributed to an increase in the supply of tea at the auction as a result of good weather that favoured production.

Normally buyers prefer purchasing KTDA teas to others because of their high quality brought about by a strict rule of two leaves and a bud, which are plucked for processing, resulting in the desired grade of beverage that many traders like.

Low-quality beverages

Most of these teas are bought by international buyers to be blended with low-quality beverages from other countries before selling them to the market.

Stakeholders have been raising concerns that Kenya loses out on mark of origin when its tea is bought and blended with those from other regions.

For instance, Pakistan, which is a top buyer of the beverage, procures more than half of the commodity in its original form as it was processed at the factories.

In the latest reforms by the government, factories would now be required to do value-addition on at least 20 percent of their teas before they are released to the market.

The government is putting up a common user facility in Dongo Kundu that will be used by all the stakeholders in value-addition of the tea before it is exported.

Other countries such as the United Kingdom normally buy Kenya’s tea for re-exporting to other countries after value-addition.

Kenya, which is the largest tea exporter in the world, ships out up to 95 percent of the total teas produced in the country. China is the world’s largest producer and consumes more than half of the total tea that they make in their own country, a move that has helped to stabilise the local price.

There have been calls from the government for Kenyans to increase local consumption of the beverage to cut overreliance on the world market, whose prices have always been volatile.

However, the campaigns carried out by the Tea Directorate over the years have not been productive as Kenyans still consume just a fraction of what is produced locally.

For instance, Kenyans consumed 31 million kilogrammes of the commodity in 10 months to October last year, with 467 million kilos sold to the world market.

The minimum price was just one of several reforms that the Ministry of Agriculture introduced to streamline the sector that has witnessed high numbers of cartels over the years.

The ministry moved to cut KTDA’s role in the tea export business.

The agency, through its subsidiary Chai Trading Limited Company, has been selling a portion of its tea directly to international buyers at an agreed price. However, in a new directive, the ministry outlawed direct sales overseas.

“All teas processed and manufactured in Kenya for the export market with the exception of orthodox and specialty teas shall be offered for sale exclusively at the tea auction floor,” reads part of the Tea Act, 2020.

“All tea factory limited companies shall register with the (Tea Board of Kenya) and the auction organizer to participate in the tea auction directly and not through management agents.”

Some multinational firms opposed the new regulations, arguing that direct sale of tea to overseas clients by contract gave them financial flexibility.

For instance, the parties could agree to fix the price in advance of the delivery of the commodity to the buyer weeks or even months ahead.

Export logistics

The contracts also gave the parties greater commercial certainty, allowing them to plan for the export logistics.

The ministry also capped the management fee that KTDA levies on farmers-owned factories to two percent as opposed to the previous 2.5 percent, with the directive taking effect last November.

In what came as a boost to farmers, the government directed KTDA to pay farmers 50 percent of the total value of the green leaf that they have delivered to the factories with the remainder, normally referred to as bonus, to be paid within the financial year.

The agency had been paying farmers just a fraction of what they delivered at the factory as a monthly payment with the bulk of it remitted at the end of the financial year.

The government also overhauled the management of the firm, a move that saw faces that have been there for ages moved out in new changes.

The long-serving managing director Lerionka Tiampati opted to resign last year after being sent on compulsory leave to enable the new team to conduct investigations on alleged misappropriation of the funds at KTDA.