In the last few weeks, we have witnessed some interesting developments concerning the reserve tea prices set in July 2021. A letter circulating on social media from the Prime Cabinet Secretary's office dated July 15, addressed to the State Department of Agriculture Principal Secretary on Minimum Tea Prices, was a major relief.
The letter asked to be furnished with information on unsold tea stocks and their shelf life, space occupied by the teas and the costs thereto, and who would shoulder these costs and other indebtedness implications to the smallholder factories.
Further media reports indicated that there were intentions to review the minimum price policy and the measures being pursued aimed at reducing the unsold tea stocks and reviewing the price discovery mechanism.
Various unconfirmed media reports indicated the unsold tea stocks could be as high as 120 million kilogrammes. Going by the 2023 national production of 523 million kilogrammes of tea, and with an average weekly tea auction absorption of nine million kilogrammes, this would translate to the equivalent of over 13 weeks' Auction Sales (that is over three months of Sales stocks). With fresh teas hitting the Auction every week, this is a real concern.
But how did we get here? And how can we avoid this in the future?
When the Minimum Tea Prices were introduced in July 2021, many experts questioned the rationale as it was not clear how they had been arrived at. Only the cost of production was mentioned with no mention of quality and prevailing market forces. At that point, its sustainability was in doubt.
Over time surplus tea stocks built up, with huge withdrawals in each Auction Sale resulting in huge disruptions in market dynamics.
The market is known to follow certain cyclical pricing patterns following global supply and demand. How were these factored into the Minimum Pricing mechanism? Price is equally known to follow quality. What was the place of quality in the Minimum Pricing mechanism?
Who was responsible for setting the minimum prices? Was it a political decision or one anchored on commercial market considerations? With the reforms in the tea industry at the time and the national elections in about a year, could the decision have been more political than commercial?
When the Tea Act, 2020 came into force on January 11, 2021, some tea industry players went to court to challenge some sections of the law. Today, there is an Amendment Bill before the Senate attempting to address some of the concerns raised in the lawsuits. Part of them have to do with the trading structure such as direct sales as well as the price discovery mechanisms, which the minimum prices may have tried to address.
Prof Michael Porter, in his Five Forces economic model, teaches how to identify and analyze an industry's competitive forces, which determine eventual prices, especially in commodity markets. The five forces are intensity of competition; the threat of new entrants to the industry; supplier bargaining power; customer bargaining power; and the ability of customers to find substitutes for the sector's products.
While setting the minimum prices we seem to have ignored one basic rule from Porter on how these forces work in the tea industry. We are now going through the pain of the missed lesson. Given we are only suppliers with weak bargaining power, we must look for ways to better our position. And yes, we can, if we are ready to walk the talk.
We must urgently review how tea valuations and pricing can be strictly based on quality. We must use a standard scientific way of determining quality away from human subjectivity, manipulation and bias. We must embrace technology to improve efficiency and transparency in trade and bring more buyers to boost competition while cutting the cash turnaround time.
Producers should compete only on quality that is known and measurable. Where they can set measurable quality targets and get commensurate prices based on prevailing market forces. This would require no Minimum Price setting.
