Anxiety in global markets take toll on local tea
Kenya's tea industry is increasingly facing uncertainty owing to a mix of factors, most of which are not within the control of the sector or the country.
This has seen prices drop substantially in the recent months with average tea prices at the Mombasa auction dropping to Sh176 ($1.76) per kilogram in July. The crop had in June averaged at Sh220 ($2.19).
Even though prices have in the recent weeks been going up albeit slowly, players warn that the rough times are not yet over.
The value of Kenyan tea exports fell Sh10 billion in the first quarter of the year on account of depressed prices that affected earnings. A Tea Directorate monthly report shows earnings dipped from Sh40 billion in the previous season to Sh30 billion in the review period, pointing to low final earnings for farmers in the current financial year.
The most recent of these factors is a spat between the US and Iran, with America hitting the Arab country with more sanctions following suspicions it was involved in an attack on Saudi Arabia’s oil facilities two weeks ago.
The US sanctions, which are in addition to last November’s, will affect critical sectors of Iran’s economy, such as the energy, shipping and shipbuilding, and financial sectors.
Iran has in the past been on the top ten list of leading buyers of Kenyan tea. It has however been dropped following the initial sanctions by the US in November last year.
The latest round of sanctions is expected to worsen the situation. A currency devaluation by Pakistan, UK’s Brexit debacle and crisis in Sudan, which are major buyers of Kenyan tea, are expected to impact the local industry.
"In July 2019, the Mombasa Tea Auction witnessed the lowest average price of US$1.76 (Sh176) ... External socio-economic and political factors have contributed to the declining tea prices,” said Gideon Mugo, Chairman East African Tea Trade Association.
"Pakistan continues to be a major player in the global tea trade. The impact of currency devaluation in that country is felt today. Inflation in Egypt reached highs of 20 percent in 2018 but is projected to drop to 14 percent in 2019. The United Kingdom continues to be unpredictable in the wake of uncertainties associated with Brexit.”
Mr. Mugo said high inflation in Sudan - hitting 70 percent and the recent political developments in the Middle East are of concern to the tea trade.
"The reintroduction of US-led sanctions to Iran is bound to have far-reaching ramifications to the trade as well. A reduction in export to Arabian markets due to the Arab spring uprising, drop-in oil prices and the heatwave in Europe have all contributed to the declined demand and consequently low prices.”
The low prices are expected to affect returns for smallholder farmers, who look forward to the annual lump sum payment dubbed tea bonus.
"The current low returns to the multinational tea companies and the KTDA small-scale tea farmers in the form of the annual final payments are popularly known as ‘tea bonus’ is a reflection on the increased costs of production and low international prices. Some tea producers have actually recorded losses,” said Mugo.
“While tea prices have been on the decline or stagnated, the tea industry is grappling with increased costs of production such as labour, fertiliser, electricity, and fuel. With the low average price of tea, most producers are not able to sustain the costs of production."
Mr. Mugo said a skewed tax regime that does not encourage local consumption of tea as well as poor implementation of regulations that has bred tea hawking has also led to the drop in prices of the beverage.
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