Williamson Tea recently called for the destruction of huge stocks of unsold tea held by KTDA to solve the ongoing tea price instability. Such calls need urgent attention. KTDA corporate communications put out a statement clarifying it did not have a huge stock of unsold teas amounting to 200 million kilogrammes as alleged. It termed this assertion untrue and unfounded. In any case, any teas at the warehouses, unless found unfit for human consumption, can never be destroyed.
What the statement did not say, however, was the amount of stocks held and the nexus, if any, of the unusual stock levels and the current low prices in the market. In previous years, there have been media reports of the stocks being as high as 80 million kilogrammes. During the launch of the Kenya Tea Industry Performance Report, 2023, KTDA reported the stocks to be at 40 million kilogrammes.
In 1998, KTDA found itself in a similar situation following an unusual bumper harvest. This led to some staff leaving the organisation following some poor decisions on the handling of the unusual harvest that led to depressed prices in the market.
In July 2021, KTDA set the reserve prices with the intention of lifting prices for its teas at the auction. This has since led to higher withdrawal of teas on offer as buyers shun those they feel are highly priced. The weekly withdrawals have led to high stocks of unsold teas over the last three years.
Tea industry experts wonder about the basis of the reserve prices as they are not tied to reserve quality. But buyers perceive some of the teas as overpriced because of their quality. Unfortunately, the situation only gets worse as fresher teas hit the market every week, adding to the stocks of older teas. This has ripple effects on the entire tea industry. I guess this is where Williamson Tea was coming from.
There are many silent rules in the market largely revolving around forces of supply and demand. First, it is important to know what drives the demand for your product. Ideally, the interaction between demand and supply components of a market dictates price.
Whoever is between the buyer and the seller has the upper hand, and quite often dictates the price. Sadly, at the tea auction, it’s the buyers. In the law of supply and demand, prices are expected to drop when supply increases. With the huge tea stocks, prices will certainly drop. Available statistics show global tea production grew by 29 per cent in the last 10 years, with global exports only growing by a paltry 0.9 per cent.
A big producer like KTDA must monitor global, regional, as well as its own production, to ensure that it is not caught at any time with excess stocks, which could plummet prices even further, stifle cashflow and trigger a financial crisis. Policies such as reserve prices at such a time could do more harm than good. Besides, reserve prices, especially in the tea industry, must go hand in hand with reserve quality.
It is quite likely that some tea factories are facing the risk of closure due to cashflow challenges. I suspect they must be borrowing heavily to continue running, paying a heavy price. We must get a way out.
There are a few options. I doubt a government bailout is feasible under the current political environment in the country. Otherwise we could have pushed for one and requested the government to donate the surplus teas strategically to some countries.
The only way out is to offload the teas in the market as soon as possible to give the industry a chance to start trading afresh. The alternative is slow offloading that would prolong the pain of depressed prices. Some people may want to argue for seeking non-traditional markets but that would take time to develop and there may not be ready for the volumes available.
Going forward, decisions on price mechanisms must first be anchored on forces of supply and demand. Secondly, as a country, we must embrace modern technology in the manner we determine tea quality and trade. Technology, objectivity and higher competition must win.