Tea prices have been on a rally in the last few months, which is expected to translate to a boom for farmers this year.
While the increase has slowed down in recent weeks, prices hit a six-year high in the first week of February when the commodity sold at an average of Sh300 ($2.65) per kilogramme at the Mombasa Tea Auction.
This is in comparison to Sh218 ($1.93) over a similar week last year, according to data by the East Africa Tea Trade Association (Eatta), which runs the auction.
Poor rains, which led to reduced volumes at the auction, as well as diversification of the market to include more orthodox teas, are among the factors that were at play last year that led to increase in prices.
The Kenya Tea Development Agency (KTDA) also said the price increase was due to reforms initiated by the Ministry of Agriculture.
“The reforms are an ongoing. We can already see good changes in the price of tea, which portends better earnings for farmers,” said KTDA Chief Executive Wilson Muthaura.
“Already, we have seen the price improve by almost 50 per cent and are selling to more markets such as Iran. We are also developing goodwill with farmers, which will help us achieve our goals.”
Among the reforms that KTDA says has been instrumental in enabling better tea prices is the setting of a reserve price. This is a floor below which KTDA cannot sell its teas.
The reserve price was set at $2.43 (Sh275.6) per kilo, which Mr Muthaura said was arrived at after considering different factors, including the cost of operations (farm level, factory, selling costs) as well as a desirable return for the farmer.
Other than the reserve price, the agency said tea supply in the market has also declined.
“Reserve prices are the main driver but tea supply also went down. The improved quality was also a factor, alongside more volume sold of orthodox teas,” said Mr Muthaura.
Kenya has traditionally sold black CTC (crush, tear and curl) teas but has in the recent past attempted to diversify with orthodox teas.
Bu while prices have gone up from an average of Sh196 a kilogramme in June 2021 to about Sh300 at the beginning of February, they have declined in recent weeks.
The price per kilogramme averaged Sh282 ($2.50) last week, down from the high of Sh300 ($2.65) per kilo earlier in February.
Further declines will test whether the reserve price can sustain the relatively high tea prices as well as hold them up there in case there is a glut in the market, especially if the weather conditions improve in the coming months.
Muthaura, however, ruled out a situation where tea from KTDA factories would sell under the reserve price, or even necessitate lowering the reserve to accommodate low bids from buyers.
KTDA would instead hold on to the tea and use it as collateral while waiting for market conditions to improve.
“Tea has a shelf life of three years. If there are no takers, tea will remain as stock that can be used to get collateral working capital funding,” he said.
“Initial monthly pay contributes 40 per cent to 50 per cent of the total pay, so we expect the volumes sold, even if lower than the average absorption of 90 per cent, to finance the monthly payment and pay for working capital.”
He said the agency is exploring mechanisms of reducing reliance on the same export markets, with expectations that more markets would increase competition among buyers of Kenyan tea.
“KTDA is looking for new markets while expanding the existing so that we improve on sales.”
Kenyan tea has recently made major inroads in a number of countries away from the traditional markets.
The Tea Board of Kenya said that last year there were enhanced shipments to emerging markets such as Iran, Malaysia, Switzerland, Turkey and the US.
The board noted that poor rains affected production in 2021, with reduced supply also having the impact of pushing up prices.