Last year, Kenya tea production rose by 35.22 million kilogrammes to stand at 570.26 million kilos against 535.04 million kilos the previous year, 2022.
This was similar to the 2020 high production that hit 570 million kilogrammes. This high production is projected to continue in 2024, given the higher-than-normal rains pounding the country.
One of the consequences of this is that the industry is faced with a glut, excessive supply of tea, with various reports indicating up to 80 million kilogrammes of teas remain unsold in stocks. This has seen tea prices take a nosedive.
As it were forces of supply and demand come to play in any market. In 2023 the average export unit price dropped in dollar terms to $2.47 (Sh318.6) per kilograme from $2.62 (Sh338) per kilogramme in 2022.
Luckily, due to favourable exchange rate to the US dollar at Sh139.85 in 2023 compared to Sh117.87 in 2022, the unit price in Kenya shilling ended up much higher at Sh345.32 in 2023 compared to Sh306.64 in 2022. This boosted export earnings from tea to a record Sh180.57 billion from Sh138.09 billion in 2022.
Commodities markets are naturally very unforgiving to those who make the wrong market moves. In the tea market you have fresh produce being discharged for sale by factories on a weekly basis. All sellers need to ensure that they are offloading as much of their produce before they are caught up by fresher produce as is the case with tea.
Once teas reach two months of age after production, any offers of such ageing teas start attracting some levels of discounting unless the market is running into supply deficits. Unfortunately, we are faced with a market that is actually oversupplied.
In 2021, the smallholder subsector introduced Reserve Prices per factory per grade of manufacture which have remained in force to-date. This was geared at addressing low prices by some teas in the market.
Unfortunately, there was no correlating Reserve Quality set, meaning a producer could produce whatever quality, without any consequences, as there would already be a guaranteed reserve price.
This is very tough for any market to accept, especially if the value of the tea on offer is below the set reserve price. This partly explains the low offtakes we are currently experiencing in the market. The excess supply in the market has made it worse.
The unconfirmed unsold stock of about 80 million kilogrammes is the equivalent of two months of national production. The market is currently absorbing about 10 million kilogrammes on a weekly basis against weekly offers of about 18 million kilogrammes.
The industry is certainly faced with a huge crisis as additional production is hitting the market each week. The ripple effect is so bad that some factories in Uganda and Tanzania that depend on the Mombasa Auction have closed. Some Kenyan factories are teetering on the brink of closure as they are barely breaking even.
But we must manoeuvre our way out of this quagmire. The Reserve Price decision without correlating Reserve Quality is ill-advised and is the first and immediate thing that must be removed.
Secondly, we must as a matter of urgency accept some pain by discharging all the huge stocks within a short time even though this is likely to lead to further price depression.
Part of this is to have special arrangements with certain markets or global institutions to offload some of these teas. Some of these measures may require special interventions at senior government levels.
Finally, it’s about time we embraced technology in the manner we analyse and determine the quality of our teas, its valuation based strictly on quality as well as trading to remove unnecessary bureaucracies and costs.
This will assure of fresher tea offers, boost the price discovery mechanisms and turnaround times that would lead to not only better prices but also save producers from the current debt cycles as proceeds could be realised in under 30 days of production. Buyers on the other hand would greatly improve their blend precision and cut hugely on the buying decision costs.
Let’s join hands to save our industry from the current glut. We must be ready for some pain today if we are to enjoy tomorrow.