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Farmers brace for huge losses as tea prices fall sharply

BUSINESS
By BENARD SANGA | November 30th 2013

By BENARD SANGA

Tea prices have been on free fall at the Mombasa tea auction, upsetting fundamentals of the traditional supply chain movement.

The commodity’s prices have hit a five-year low with some trading below their cost of production.

Traders warn that farmers would suffer heavy losses as the problems have been exacerbated by rise in the cost production.

Mid November, East Africa Tea Trade Association, the entity that runs the auction, raised the red flag, calling on the government to intervene. The move was aimed at saving the country’s second leading foreign exchange earner after tourism from collapse. “The decline in auction prices has eroded farmers’ earnings considerably. The whole industry is facing serious cash flow problems, with various teas selling below their cost of production,” said the association chairman, Lerionka Tiampati in an advert in a local daily.

Tea glut

Tiampati who is also the Managing Director of Kenya Tea Development Agency, urged the government to encourage farmers to stop planting more tea. Tea production in the country increased to 399 million kilos in

2010 up from 314 in 2009. In 2011 it went up to 377 million kilos while last year it eased to 369.5 million kilos, according to Tea Board of Kenya (TBK), the industry regulator. TBK projects the production this year to hit 415 million kilos. According to TBK acting Managing Director, Zakayo Magara, the glut has suppressed prices at the auction.

The commodity’s traded at $2.14 (Sh183) a kilo compared to $3.17 it (Sh276)sold last year, in this week’s auctions. “Ideally, price movement is dictated by market dynamics.,” said Magara, in an interview this week.

“We continuously monitor the auction and the players, and we are engaging the industry and we are expecting the prices to stabilise due to lower quantities anticipated in coming auctions.” He noted  that the accumulative production in the first eight months had increased by 29.9 per cent. Though Kenya, a significant player in the global tea market accounting for almost 10 per cent of the global production and almost 23 per cent of the world’s export, has seen unstable tea prices since 2000. But some traders are blaming the regulator’s failure to give market forecasts saying that the sector was riding on excessive market speculations.

Traders say good prices sparked the rush to plant more. This has increased production locally and in Sri Lank and India, which also produce black crush, tear and cur (CTC) teas.

An increase in tea production in East Africa, which trade at the Mombasa auction, has been reported in the recent years with Rwanda 17

per cent, Uganda nine per cent and Tanzania 18 per cent. According to the East African Tea Trade Association, political and economic turmoil Egypt, Pakistan, Britain, Afghanistan and Sudan, which account for 70 per cent of Kenya’s export has worsened tea trade in Mombasa.

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