Data Hub

Will online auctions quell storms brewing in tea, coffee sectors?

coffee2
geraldandae

Summary

  • For decades, Kenya’s main commodity markets have been running on a manual platform with the arrival of the final price shrouded in secrecy.
  • It was a practice that bred discontent among farmers who watched as their earnings dipped one crop season after another.
  • Some, feeling short-changed by the system, cut down their crops in protest, prompting the State to seek alternative platforms that would boost transparency in the commodities trade.

For decades, Kenya’s main commodity markets have been running on a manual platform with the arrival of the final price shrouded in secrecy. It was a practice that bred discontent among farmers who watched as their earnings dipped one crop season after another.

Some, feeling short-changed by the system, cut down their crops in protest, prompting the State to seek alternative platforms that would boost transparency in the commodities trade.

This saw the auction of the main commodity markets-Tea Auction in Mombasa and the Nairobi Coffee Exchange going digital from early last year in a move expected to create price efficiency- belief that prices reflect all available information by all market participants. To achieve this, processes are now fully automated with trading reduced from physical meeting to online.

In the old system buyers, sellers and brokers would converge in auction hall to make their bids. But in the new set up, the bids are placed online on the platform that is accessible to most stakeholders.

Mr Edward Mudibo, managing director of the East Africa Tea Traders Association (Eatta), which runs the auction, said their new system would lead to “enormous benefits” for both parties.

Shorter trading cycles

Mr Mudibo said the system had boosted efficiency by shortening the tea trading cycles by riding on the availability of central, accurate and ready information, disseminated at each level.

Besides this, the switch has also translated to cost savings on catalogue paper usage as well as other expenses. Mr Mudibo said taking the auction online, will contribute to a significant reduction of direct costs associated with the auction process, mainly administrative costs.

Additionally, it has opened multiple trading windows and hence the possibility of breaking bulk transactions. This, Mr Mudibo said, will enable tea packers to effectively participate in the auction.

Eatta also pointed out that is had reduced the risk of infection among traders during this pandemic period.

“Going live and operating virtually has reduced the rate of infections amongst the traders, saving lives as all the active 60-year olds and above no longer meet (physically) but operate remotely from their offices and homes,” said Mr Mudibo.

The integrated tea trading system is created with different components playing different roles at the auction.

For instance, it comprises inventory management platform that will guide the committing of teas for sale by producers, manage the dispatch of teas , which essentially entails booking of transport service providers, loading and stuffing and the tracking of tea under transit to designated warehouses in Mombasa.

The platform will also include a virtual warehouse management system that will enable tea arrival verification, inventory documentation and notifications.

The platform supports the logistics organisation for tea destined for auctioning by providing visibility and predictability of the movement of the beverage from the factory warehouses to the designated auction warehouses in Mombasa.

The e-Catalogue platform will automate the generation, transmission, use and storage of the tea catalogue throughout its life cycle. For example, producers and buyers will be able to access the same document as the broker in real-time.

Market dynamics

On the other hand, the trading analytical platform will have a variety of analytical tools and instruments that will have the capabilities to mine, analyse, visualise and warehouse tea trade statistics that will aid in tea auction price determination, analyse market dynamics and avail information to potential market entrants. This will support the drive towards a data-driven decision approaches in tea trading.

The trading management platform will complement the out-cry method and introduce much shorter, more scientific, intelligence-led auction process. Before the automation, a bell had to be rang to confirm a bid.

The trading payment gateway platform will centralise and manage all payments transacted after the buying and selling of tea. This will make it possible for producers to be paid to any bank of their choice (for as long as the bank is linked to the platform).

Daniel Mbithi, chief executive officer of Nairobi Coffee Exchange, while not giving much details about their system, said the electronic platform has created efficiency in pricing of the commodity, coming as a boost to farmers.

“The high prices that we have been witnessing are a result of the digital platform that we are using at the moment,” said Mr Mbithi.

As commodities trade intensifies on the new online systems, the ultimate test will be whether they will deliver greater value to the producers.

New platform

The important role the two commodities play in the economy was highlighted when trading was momentarily stopped in April last year by the Ministry of Health citing lack of sufficient space to ensure proper social distancing in line with Covid-19 protection guidelines.

The move caused tension among the stakeholders as the interruption on tea auction alone would have cost them millions of shillings in losses.

In a day, the Mombasa tea auction alone transacts business worth more than Sh2 million. It is the world’s second largest auction with the country being the number one exporter of the commodity globally.

The Tea Directorate under Agriculture and Food Authority (AFA) has been in the forefront calling for automation of the markets in order to create transparency and efficiency in the market.

AFA director-general Anthony Muriithi said the new platform will enhance the opportunity for marketing and selling value added teas, increase the volumes of tea sold at the auction in a period of time as well as enhance transparency in the tea export process especially in price determination.

“This is a system that comes with a lot of benefits for stakeholders and it will go a long way in promoting transparency at the auction,” said Mr Muriithi. “These benefits are meant to circumvent the governance challenges surrounding the price discovery mechanisms at Mombasa Auction,” he added.