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:
- Does the intended strategy change take into account the realities of the current world market for tea and coffee?
- 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?
- Is the timing right given the current world recession in terms of receptiveness of world market to a new brand?
- Who is going to do the centralised organisation required to market both produces?