Call for Mombasa to “Rethink” Automated Auction

When purchased in large quantities, tea is generally acquired at auction centers around the world. Indonesia, India, and Sri Lanka all maintain auction centers close to where the tea is produced. These global auction centers (there are 14) account for the sale of virtually all the cut, tear, curl (CTC) manufactured and much of the orthodox (whole leaf) tea sold outside China.

Mombasa Tea Auction

In Africa, the auction center at Mombasa, Kenya predominates. Transactions there represent about 75 percent of the 360 million kilograms of black tea exported through the nearby port. Members of the East African Tea Trade Association (EATTA) rely on the auction as the center of trade for the entire continent.

India’s auctions, which were outcry for more than a century, were the first to convert to digital bidding systems. The intent was to streamline payments and increase the number of bidders to get sellers a better price. Kenya took its first steps toward automation in 2012 by introducing the idea to members of the Kenya Tea Development Agency (KTDA), a marketing cooperative representing several hundred thousand growers.

Tea Auction Market, Kakali Hazarika

Proponents argued that “price discovery” is predicated on the belief that when there are more bidders, outcomes will be more favorable for all. A digital auction seemingly makes it more convenient for buyers to take part, enabling decision-makers to view the progress of the auction with the aid of digital notifications, online charts, historical data, and software to assist with logistics. It took several years to advance the idea and secure financing.

In December, EATTA signed a Sh150 million ($1.5 million) agreement with Trade Mark East Africa (TMEA) to automate the 60-year-old auction within the next 18 months. Converting the auction to a digital platform is now underway but influential tea suppliers in Kenya continue to publicly question the benefits.

The most outspoken critic is Salaah Balala, managing director of Africa Tea & Coffee Co. Ltd, who expressed his concerns last week in a letter published in The Standard.

“It is hoped that once the auction is digitalized, and open to the world, we will be able to get better prices for our tea, as opposed to the current system where competition is ‘limited’ to the brokers inside the auction room,” writes Balala.

“I find this notion misguided for a number of reasons. It is said that the focus is naturally on price discovery and about finding ‘the real price’. The reality is that by removing the competitive nature of human interaction within the auction room, it is most likely the ‘real price’ discovered will actually be lower and not the optimum price possible,” he writes.

The overriding influence on price discovery is simply the mechanism of total supply and total demand being the main determining factors, argues Balala. In reality, brokers and human nature exert tremendous control. Bids among four dozen men in a room, situated in the same time zone frequently joust and find advantageous positions for their clients by trading in information unavailable to others in distant time zones, despite their digital tools.

Developments in India, the first country to automate its tea auctions, have also caused tea executives to “rethink” their decision. The lack of proper training for buyers and system-related errors are major causes of concern. Banking systems were unable to process payments in a timely manner and funds from bids from outside the country can be difficult to collect if the buyer defaults.

Paras Desai, vice chairman of Federation of All India Tea Traders Association (FAITTA) and executive director of Gujarat-based Wagh Bakri group, cited a number of reasons to question the benefits of digital auctions, including the most troubling fact that the price paid for auctioned teas has fallen by INRs8 to 10 per kilo. Darjeeling tea prices fell almost 25% last year following the switch from outcry to digital auctions, he said.

Kenya’s President Uhuru (right) visits Mombasa Tea Auction with EATTA chairperson Nicholas Munyi (left)

In 2015, Kenya’s President Uhuru Kenyatta pushed for the transition in part because of the poor prices tea growers received in Mombasa. Growers came to believe prices were rigged. In response, EATTA began live-streaming auction proceedings in an attempt to increase efficiency and transparency ahead of the introduction of electronic auction, which was scheduled to go live that spring. An experimental live auction offered by the CFC Stanbic Bank paved the the way to developing a sales payment system. Today there are only 31 followers of the live stream, which was viewed 21,800 times, suggesting that televising proceedings has little impact on concerns about transparency.

Edward Mudibo, managing director at EATTA, predicts the new technology will reduce the cost of financing auctions while increasing trade volumes by 15%. Trades that now take 45 to 60 days to conclude will be reduced to less than a month. Timely payments eliminate the need for farmers to take short-term loans to finance operations, according to Mudibo.

“Once fully implemented, the platform will ensure that stakeholders of the tea auction including farmers, buyers, and sellers receive realtime information on what is happening on the auction bourse, which will boost confidence in the process,” Mudibo told The Nation.

EATTA members include growers and traders from Burundi, Rwanda, Uganda, Democratic Republic of Congo, Tanzania, Ethiopia, Malawi, Madagascar, and Mozambique.

Sources: The Standard, The Nation, Web India