Monday, June 01, 2009

Closure of coffee and tea auction houses a good call?

Price discovery is important to the functioning of a market economy. Price discovery is basically a mechanism by which the price of a product or service is agreed on. In almost every market, there exists a price discovery mechanism that acts as a signal to potential and existing buyers and sellers of where the price for their product of interest is heading. In the absence of a commodities futures exchange in Kenya, or the equivalent of the National Cereals Board, the tea and coffee auction houses have acted as the main conduit for this price discovery. The auction houses have also been used for blending which is where they take tea from Kenya and blend with that from India as an example and brand it Earl Grey. This later role is what I believe has caused the issues that led Ruto to announce the closure at the end of '09.

To close them down without a viable solution for the price discovery mechanism seems to me to be an act of folly and which will probably lead to farmers being messed up even more. And what about reforming the auction house by for example banning the blending of Kenyan tea, but keeping the price discovery aspect of the auction houses? Or going for a more evolved commodities futures market that mirrors those in the US?

2ndly, the Kenya tea branding exercise that is proposed as a replacement seems more to be a copy of what Ethiopia did successfully with its coffee (though it has to be said the Ethiopians had the bargaining chip and were well organised in comparison). Several queries though:

  1. Does the intended strategy change take into account the realities of the current world market for tea and coffee?
  2. Does Kenya as a producer of both products have the bargaining or product quality power to be able to launch a Kenya tea and coffee brand into the market?
  3. Is the timing right given the current world recession in terms of receptiveness of world market to a new brand?
  4. Who is going to do the centralised organisation required to market both produces?


Proud Kikuyu Woman said...

Good question. Maybe this is going to open an avenue for farmers, or at least individual factories to sell directly to buyers, which is great in my opinion.
My gut feeling is that KTDA has been screwing farmers; all farmers in any particular KTDA'd factory get the same average price per kg of raw tea per year, meaning quantity is all that matters.There is no mechanism for rewarding quality and punishing crap, and this may just be the start to such a thing. We'll see.

MainaT said...

PKW-unfortunately I don't think the edict was aimed at KTDA as the collection agent and main seller at these auction houses.
That does need to happen i..e the actual introduction of other collection agents (but not like that Tea and Coffe clown outfit).
In the meantime, how will farmers know if they are getting a good price?

coldtusker said...

ruto is an idiot. He may have delivered votes to ODM but he remains an idiot underneath all the 'sheen'.

He is pushing for policies that encourage corruption & rent-seeking.

Without a vibrant auction who will buy the tea? The 2nd window (aka direct sales) are allowed for ALL tea producers.

Blending is a fact of life. It is about BRANDS rather than the type of tea...

Folks go to Starbucks then choose the 'blend'... Kenya is essentially brandless (even with the Obama factor)

MainaT said...

CT-how is a farmer from Nyeri going to take his tea to the US. Who is exactly is he going to sell to locally and how will he know what is the right price?
Won;'t the banning of the auction houses without any moves to open the tea industry to other player lead to greater exploitation of farmers who are mainly in co-ops that currently sell to KTDA?