How KTDA arrives at tea ‘bonus’ prices


KTDA managing director Lerionka Tiampati

The Kenya Tea Development Agency (KTDA) this week released details of payments it is making to farmers for leaves delivered in the financial year ended June 2015.

This year’s Sh64 billion payout was a rise of 21 per cent above the Sh52 billion that the growers earned the previous year.

The Business Daily spoke to the agency’s managing director Lerionka Tiampati on the state of play in the industry and how it might close the current year.

What is your view of the performance you have just announced?

An upward spike in tea production the previous year led to a drastic fall in tea prices by up to 30 per cent, greatly impacting farmers’ earnings. In the year ended June 2015, performance significantly improved compared to the previous year.

Total revenues were up 20 per cent to Sh63.62 billion from Sh52.97 billion last year. Returns to farmers increased 21 per cent to Sh43.25 billion up from Sh35.50 billion last year.

The main drivers for this performance were better tea prices (up seven per cent compared to last year), a favourable exchange rate, stable sales volumes and austerity measures implemented to control the cost of production.

Why are there disparities in bonus payments that have left some factories earning more than others?

There are various reasons for the income variations. Factories process varied volumes of tea depending on the size of the catchment area and ultimately the volumes. This determines capacity utilisation at the factory level and hence cost efficiency.

Factories also fetch different prices in the market (auction or direct market) which is determined by quality of leaf, that of processed tea and customer preferences.

The cost of production also varies from factory to factory based on labour and energy efficiency, cost of credit and investment income.

Those factories with expansion projects such as construction of new facilities that are financed through loans will incur higher finance costs that can be substantial given the current interest rate environment.

Factories with healthy cash flows and which have no need to borrow will ultimately invest their surplus cash in the money markets thus earning higher interest income for their growers.

There have been allegations that KTDA management fees to factories are exorbitant. How true is this and how do you justify the levy?

We have signed management contracts with the tea factories that stipulate the services offered and fees charged. We currently earn 2.5 per cent management fee for clearly defined services as stipulated in agreements.

This has over the years come down from a high of five per cent. The market rate for management fees in the tea industry stands at between six and seven per cent. This makes our rates reasonable for the scope of services we offer.

What many may not know is that KTDA and its subsidiaries are owned by the tea factories as corporate shareholders and hence by tea farmers who own the factories.

Any revenue that KTDA earns goes to the tea factories as dividends and to tea farmers as income. One key service we offer to the tea factories is negotiating with financiers for credit at competitive rates and guaranteeing such facilities.

The management contracts are negotiated with directors elected by the farmers.

How do you arrive at tea prices?

The key outlet for our tea is the Mombasa auction but there are also direct sales overseas or locally. The auction is an independent sales outlet with its own governance structure and transparent pricing mechanism.

Key players are represented here, among them tea producers, tea buyers and tea brokers each representing their principals with varying pricing objectives.

Prices are determined by forces of supply and demand that are reflected at the auction and as the reference for overseas sales. World over, in the main tea growing countries of India, Sri-Lanka and Kenya, auctions have been used to trade and determine prices.

The cost of production went up from Sh71 per kilogramme of made tea the previous year to Sh80 in the year under review. What measures are you putting in place to cut down on operation costs?

Cost of production continues to rise due to inflation, high energy, labour, financing and transport costs. Energy is the single largest driver of our cost of production.

We have put in place various measures to manage our costs, key among them investment in hydro-power. Consumption of own generated hydro-power will considerably reduce the cost of energy.

We are implementing various other initiatives, including use of alternative renewable energy sources, automation, efficiency enhancement and competitive sourcing of credit.

Some of the counties have passed Bills that will make them independent of KTDA – a move aimed at taking over the management of their own factories. Is this a step in the right direction?

Under the Constitution, certain functions such as Agriculture have been devolved. To implement these functions, counties in conjunction with stakeholders and the national government have to draft new laws to regulate the various functions under their management.

The tea factories and KTDA, being major stakeholders in the tea business, are working with the counties, the national government and farmers to come up with laws that regulate the tea sector for the benefit of all stakeholders.

Farmers have complained that KTDA has ignored growers and instead paid more attention to its subsidiaries. How true are these claims?

KTDA has worked with farmers, the government and many other stakeholders to enhance and improve smallholder tea farmers’ plight for 52 years.

KTDA, its subsidiaries and tea factories are one and the same and exist solely for promoting the welfare of small-scale tea farmers. These subsidiaries provide services along the value chain that either enhance services or reduce the cost of doing business.

Any income earned from such ventures ends up with the farmers through dividends paid to the tea factories. In the past 10 years, KTDA has paid more than Sh3 billion in dividends to its shareholders, which have in turn been paid as bonuses to the farmers.

Is there a mechanism in place to protect farmers’ earnings in the event of price volatility in the global market as was the case last year?

We have stepped up revenue retention measures during good times to cushion farmers during bad times. We are training farmers not to put all their eggs in one basket by diversifying to other non-tea ventures.

Additionally, we are diversifying our products to enable us enter new markets with the introduction of orthodox and green tea.

You were to install new lines for orthodox tea. How far have you gone with the plans?

We have installed a line each at three of our managed factories namely, Itumbe, Michimikuru and Kangaita. Several other factories are lined up for roll-out in the coming months. This is a long-term project whose execution will take at least three years.

Is KTDA planning to roll out more of these specialty lines to the rest of the factories?

We will be guided by the market response to our orthodox teas in deciding whether to roll out the lines to all the factories.