Why tea bonus prices vary across factories

The morning of September 6 was one of contrasts. As Kenya Tea Development Agency (KTDA) CEO Lerionka Tiampati announced the highest tea bonus payout ever, a group of farmers in Nyamira engaged police in running battles, protesting low payments.

The farmers started the protests after they got a breakdown of how the bonus would be paid, accusing the tea agency of short-changing them and giving farmers from other counties better rates.

Their spokesperson, Justus Motanya, claimed an audit firm had informed them they would be paid Sh29 per kilo of tea as bonus, but this had reduced to Sh26 in the official communication from KTDA.

And a week earlier, farmers in Thumaita tea factory in Kirinyaga County attempted to burn down their factory, also protesting poor bonus payments. They stormed the homes of two factory directors and pelted them with stones.

The factory had announced Sh41.50 as the bonus payment rate for every kilogramme of tea delivered; farmers were anticipating Sh45.

Social media

When announcing the official payout last week, Mr Tiampati  noted that there were false bonus payments circulating online.

“There were figures that were passed round on social media that were not true and incited farmers to violence.”

The agency, which represents more than 600,000 tea farmers, has since sought to set the record straight.

“Farmers have been advised on the correct [bonus] position through the media and various stakeholder meetings in their catchment areas. They were advised to always seek the correct position through their factory companies, and not through unverified information from unidentified individuals or social media,” Tiampati told Business Beat.

“Factories belong to the farmers and not directors, and the cost of restoring damaged assets will be borne by these same farmers.”

The farmers who had boycotted tea picking have since gone back to work.

The initial protests that hit some factories had followed KTDA’s announcement that it had earned Sh84 billion in revenue in the financial year to June 30, 2016. Of this amount, Sh62 billion will be paid directly to farmers at an average rate of Sh50.3 per kilogramme of green tea delivered to KTDA-managed factories – an increase of 21 per cent from Sh41.6 per kilograme paid last year.

The balance, which constitutes a quarter of total revenues, will go towards covering the costs of production at individual factories.

Improved earnings

Tiampati attributed the improved earnings to a 25 per cent increase in tea prices in shillings, on the back of favourable exchange rates.

The volume of tea sales also increased 5 per cent as a result of good weather. There was also a slight increase in demand for tea in new markets, such as the US, Poland and Iran, as well as the existing markets of Egypt and Pakistan.

Better interest earnings on bank deposits also contributed to the improved payout.

“In a nutshell, the increased payout was a result of good quality tea resulting in better tea prices, favourable exchange rates, higher volumes of tea, and reduced costs of production,” the CEO said.

The average cost of production per kilogramme of made tea further decreased by 4 per cent on average, from Sh80.37 to Sh77.19 due to improved efficiency at the factory level.

Different payment

During the announcement on the second payment, which is what is known as the bonus, a tea farmer rose to ask how the money was distributed, and why some factories in Kericho and Bomet were paying farmers more than others in areas like Nyamira.

Tiampati explained that high energy costs, labour and transport costs are some of the reasons for this disparity, with factories that manage their costs better paying out a higher rate.

“Energy remains the single-largest contributor to the cost of production. This is the reason our factories are investing in small hydropower stations to lower energy costs,” Tiampati said.

Tea quality is another key factor.

Kenya exports more than 95 per cent of its tea, which means prices are determined by global market forces of demand and supply.

“The price paid by buyers is determined by the particular tea quality and attributes that a buyer is looking for based on their market preferences,” Tiampati said in an interview over the weekend.

“Particular tea attributes are dependent on ecological factors, such as soil types, altitude, rainfall intensity and distribution. They are also dependent on the tea clones planted, plucking standards, post-harvest handling and processing at the factory. These attributes determine the tea characteristics of make, liquor, aroma and flavour.”

With all this in mind, this year, the Kericho/Bomet region will get the lion’s share of the revenues earned at Sh13.18 billion.

The Kiambu/Thika region will get the second-highest share at Sh12.74 billion, while factories like Tombe in Nyamira will get the lowest pay per kilogramme at Sh22.

Higher volumes

But for Tiampati, there seems to be undue focus on the earnings per kilogramme of made tea as a measure of the return to farmers – which tends to overlook other factors in the value chain, such as productivity, capacity utilisation and the volume of tea processed and sold.

“For example, the top two leading factory companies in terms of total payout recorded Sh3.7 billion and Sh2.2 billion,” he said.

“Due to higher volumes of tea produced and processed, farmers in these factories received more money than their counterparts in factories that recorded the highest bonus rates per kilo, but produced and processed relatively lower volumes of tea.”

Factory tea volumes depend on the size of the catchment area and the green leaf picked. This determines capacity utilisation at the factory level, and hence cost efficiency.

Aside from the influence of crop quality and quantity, factories’ costs of credit and investment income also determine revenues earned.

“Those factories with expansion projects, such as construction of new facilities, that are financed through loans will incur higher finance costs,” the KTDA boss said.

“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.”

Tiampati added that it is critical that farmers pay more attention to their factories to improve earnings.

Last week, Tiampati warned 2016-17 earnings may be depressed as unreliable weather conditions have already started to affect yields.

“The year has started out a bit badly. Bad weather conditions and little demand for our tea don’t offer a promising outlook for next year,” the CEO said.

This makes it critical for factories to manage costs and emphasise leaf quality to maximise earnings.

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