By Dan Bolton
Five years after going digital, the tea auctions in India remain in disarray. The Federation of All India Tea Traders (FAITTA) warns that price discovery -- the primary reason for financing the digital auction is failing.
In January, FAITTA, India’s largest body of professional tea traders asked Tea Board of India to undertake a thorough evaluation of the e-auction before completing the planned national rollout in 2021. Doing away with tradition-bound out-cry auctions of the 17th century was supposed to open the market to outsiders unwilling to staff offices in Kolkata, Coonoor, Kochi, Guwahati, Assam, and 10 other auction centers.
Opening auctions to outside bidders generally results in trades at "fair market" rates, with individual lots going to the winner based on the highest bid—single bids can be outliers. If a bidder decides they must have a particular lot, they will undoubtedly top that of other interested parties, but this sale should not skew the price norm or long-term trend.
Auction prices indeed rose in 2020, but for unusual reasons related to production shortfalls, ground transport and the shortage of shipping containers, the displacement of workers, illegal leakage of imported tea for re-export, and reduced processing capability exacerbated by the pandemic. Lower output lifted average tea prices 31% last year compared to 2019, resulting in a record average of INRs185 rupees ($2.53) a kilo.
Viren Shah, chair of FAITTA told the Financial Express that structural rules that govern the auction must be revised, citing "the faulty logic of knockdown of lots. The maximum bid price logic for knockdown could have serious disadvantages in the long-run and impact buyer participation in the auctions. This could be counterproductive to Tea Board's intent and the interest of stakeholders," he said.
“The auction system, if implemented in its current configuration, can lead to an unnecessary hike in tea prices,” according to Shah. In other words, "e-auction prices do not reflect the reality on the ground,” he said.
The e-Auctioneer’s User Manual, published by Tea Board, states that “the number of sold and unsold lots will be updated with each knockdown cycle in each auctioneer’s session.” The manual states that, “The knockdown will start on completion of the bidding time for the active lots [as configured by the admin]. All the bids received for the lots will be arranged and knocked down. The system can automatically knockdown the lots which have met or exceeded the reserve price. In the knockdown lots, you can view the report by selecting the appropriate season, sale number, auction date, and auctioneer.”
Auction prices in 2020 were around 35% higher than in 2019 (averaging INRs80 per kilo higher). "This was the result of a fair price discovery mechanism based on demand and supply,” writes Shah. “Tea production last calendar year was 1.25 million metric tons, around 100 million kg (m.kg) lower than the previous year’s output of 1.35 million metric tons. Retail tea prices rose by an average INRs70 per kg during the year,” he explained.
Will Production Declines Continue?
The spring harvest has yet to begin, but one trend appears certain: smallholders collectively are outproducing registered plantations. Bijoygopal Chakraborty, president of the Confederation of Indian Small Tea Growers’ Associations (CISTA) estimates that smallholders produced 631 m.kg of tea in 2020, surpassing the 625 m.kg produced by registered estates.
“Even in 2019, at the national level, our [small tea growers] contribution was marginally less than the organized sector [tea estates]. This year, however, our share is more than the estates, and we hope the trend continues in the coming years. Many growers are first-generation rural entrepreneurs, and it is indeed an achievement,” said Chakraborty.
India tea exports declined in the first 11 months of 2020, falling 18.2% from the previous year to 188 m.kg. Prices also dropped due in part to the fact that Kenya produced a bountiful harvest.
Tea output declined 9.7% in 2020, but good weather in West Bengal is easing concerns for 2021. Covid is less feared and lockdowns are less likely. No one knows exactly why, but India's Covid caseload has plummeted to under 10,000 per day even without widespread distribution of the coronavirus vaccines.
Mechanization is also critical in retaining youth in the farm sector. Africa’s agribusiness economy will be worth $1 trillion in 2030, according to Kaumbutho, “Kenyan youth need to keep their eyes and innovative prowess around the agriculture sector,“ he said.