In my previous opinion column, I argued that with just three key policy interventions, the journey to greater earnings for tea farmers would be on course.
I zeroed down on providing a better Price Discovery Mechanism that enables greater transparency, cuts red tape, and opens up the field to more players. Second, improving Producer Factories cashflow but shortening the period it takes to convert processed tea into cash in their bank accounts. And third, restructuring the tea industry to remove predatory structures which eat up the farmers’ real and potential earnings.
We cannot have a proper grasp of these three interventions without paying a little attention to the tea industry’s history and the journey thus far.
Tea planting in Kenya commenced in 1903, which is over 120 years ago. But commercial cultivation did not start until 1924 led by the white settlers in their bid to meet demand for a lucrative growing market in the West.
And it was not until 1952 that Africans were allowed to grow tea. Before that, Indigenous communities had been forbidden by law from growing tea.
Since then, the tea industry has experienced tremendous growth in total planted acreage and the production of tea has played a critical economic role.
Tea is also one of Kenya’s top foreign exchange earners, currently commanding about 23 percent of forex inflows.
Perhaps most importantly, the sector supports over 1 million smallholder farmers, in addition to over 6 million people that directly and indirectly depend on commercial activities related to the tea sector for their livelihood. Tea cultivation is also a rural-based economic activity that has led to tremendous development of rural infrastructure such as roads, schools, health centers and other social amenities.
Over the years Kenya has emerged as the third leading producer of tea after China and India, accounting for about 8 percent of global production. Due to our small population compared to these two tea producing global giants, Kenya is the largest exporter of black CTC tea, accounting for 22 percent of total tea exports globally.
In both India and China, much of the tea produced is consumed locally and not exported.
But we must take note that about 80 percent of Kenyan tea is sold through the auction market with the balance being sold through direct or factory door sales.
All selling prices outside the auction are pegged on those realized at the auction. At the auction, Brokers analyze the quality of the teas from produce, undertake a valuation based on the quality performance and other prevailing market factors and then offer the teas at the auction floor for Buyers to bid and buy the teas. This is the Price Discovery Mechanism mentioned above.
It therefore follows that the process of tea quality analysis that leads to quality determination and valuation is critical to the price discovery mechanism.
Given there are many people involved undertaking this critical exercise, the need for a common reference standard and transparency is key. This is the only way for producers to establish quality targets to help chase value in better prices.
Ultimately Buyers bidding for the tea make payment at an agreed on price. The relationship between the Broker quality analysis and valuation, and the eventual Buyer valuation and pricing is key as it completes the Price Discovery Mechanism. The interventions required MUST provide greater transparency, cut any red tape, and open up the field to more players.
This would lead to economic expansion and better prices. And this is the place where innovation, science and technology can play a critical role.
As the Kenya tea industry grew, the challenges that the tea industry faces, continue to threaten the industry sustainability and livelihoods of millions of farmers, stakeholders, and their dependents. Continued Policy, Regulation and Administrative Reforms in the Tea Sector in Kenya remain a necessity. The reforms must deliver better prices by cutting high operating costs while fixing the price discovery mechanism. This can only happen sustainably with better governance structures that address the various operational bottlenecks that hinder driving business value especially within the smallholder subsector.