Huge volumes of unsold tea at Mombasa auction raises red flag

A glut of unsold tea is building up in Mombasa due to increased production and recent state policies, sparking fears of continued depressed prices of Kenya's top foreign exchange earner.

Traders said the surplus was because of the implementation of the reserve prices directive and the halting of direct exports by the Kenya Tea Development Agency (KTDA).

However, the low tea absorption at the auction is also said to be due to the declining quality of tea in the country and dollar challenges in export markets. Yesterday we established that at least 13 warehouses are full of unsold tea.

Fear is rife at the auction that if the trend persists, farmers will be unable to earn sustainable income from the crop due to a saturated market due to higher supplies and stagnant demand.

Tea trade experts in Mombasa are now calling for concerted efforts to slow down tea production in the country through market intelligence-led sound policies by the state.

However, other traders are also calling on farmers to diversify and shift from producing black to green tea, fetching better prices at the international markets.

Data from the East Africa Tea Trade Association (EATTA) shows that the problem started last year when over 40 percent of the tea offered for sale was unsold.

In 2023, data by EATTA shows that 770, 276, 687 kilogrammes of tea were offered for sale in the auction, and 457. 0462, 462kg was sold, meaning 40.7 percent remained unsold.

In 2020, the average price of tea at the auction was Sh281.78 ($1.93), and since 2023, it has remained constant at an average of Sh308.06 ($2.11), sparking claims of collusion at the auction.

Yesterday, EATTA Managing Director George Omuga said tea offered in a single action has doubled from 9 million kilos in 2023 to 18.5 million kilos in 2024.

"In 2024, from sale 1 to 7, the weekly auction offers have increased to 18.5m Kgs with an average outlots (unsold) of 47 percent," said Mr Omuga in an interview.

He said most of the different varieties of tea offered during the seven sales at the weekly Mombasa tea auction either fetched lower prices, withdrawn for lack of bids, or low bid offers.

Kenya's crush, tear, and curl tea (CTC tea) production was 350m kg in 2012 and over 560m kg in 2020, and most analysts had forecast that the 2023 production would hit 600 million kilos.

However, trade analysts at the auction say that increased production of similar tea in India and Sri Lanka also continues to affect the prices of the Kenya leaves on the global markets.

Omuga said the decline in the quality of some teas as a result of weak enforcement of regulations and a mismatch between elastic supply and saturated or stagnated demand was unsustainable.

The MD of EATTA, which runs the auction, said it was time stakeholders agreed on the maximum quantities threshold and minimum quality standards that should be acceptable in the auction. He said this would "mitigate depressed process which may make tea production unstainable."

"The industry must come up with tea offers the auction can absorb by addressing the maximum quantities threshold and minimum quality standards acceptable in the auction," said Omuga.

Mr Abdi Hussein, the chairman of tea producers at the EATTA, said tea prices at the Mombasa auction had stagnated for a year despite the escalating cost of production. Mr Hussein is the representative of all tea farmers at the Mombasa auction.

"Unions are currently demanding a salary increase of between 15 and 25 per cent for employees at tea estates and spares for machines are also costly, the prices are unsustainable," said Hussein.

He admitted that the quality of tea has dropped due to the use of tea-picking machines but excluded confidence that it will improve as producers gain experience with the new technologies.

"If the prices continue to be this low, I fear we will kill the goose that lays the golden egg (farmer). We must protect the farmer," he said.

Peter Kimanga, a director at Mombasa-based UK's Global Tea and Commodities, said Houthi rebels on ships off Yemen had also affected tea exports, resulting in huge outlots.

He said the freight has increased from Sh218,250 ($15000) to Sh436,500 ($3000) per container because ships use the longer route to avoid the Houthi at the Red Sea.

"There is a 16 per cent duty on all the tea that is value added locally, and 35 per cent import duty on packaging paper. This has made tea value addition expensive," said Mr Kimanga.

Most ships to Mombasa have re-routed around the Cape of Good Hope, covering an extra 5,459 nautical miles compared to those using the Suez Canal, to avoid the attacks.

According to Kimanga, the government should strive to enable traders to export original tea by scrapping some tax policies inhibiting the value addition.

"Ninety-nine per cent of Kenyan tea is exported in bulk because of punitive policies and tax regimes that have made value addition expensive. Through value addition, prices will go up," he said.

Tanzania representative at EATTA, Mr Jefferson Moturi, said due to a drop in prices some factories have closed in Tanzania and Uganda because farmers were abandoning the crop.

"In Tanzania, we pick tea for eight months and irrigate the bushes for four months, a costly exercise. Factories are closing down because it is no longer a profitable venture," said Moturi.

EATTA chairman Arthur Sewe admitted that the overproduction of tea in Kenya and the other 10 countries trading the commodity at the Mombasa auction was a big concern.

"The tea prices at the auction are determined by the forces of demand and supply. We are engaging the stakeholders to come up with innovative ways forward," he said.

Veteran tea trader Daniel Tanui said cess fees charged tea for moving between counties and delays at the borders due to non-tariff barriers at borders also eat into the farmers' earnings.