Producers, brokers disagree on tea sale via auction only

Estate and large tea producers, instead of supporting a 100 per cent auction model, say they want the Board to diversify sales channels. Their primary claim rests on the “basis of free market access for fair price discovery”.
The Tea Board’s proposal to have all tea sold only by auction has led to disagreement between producers and brokers, the major two stakeholders in the trade.

Brokers favour all the produce to be routed through open auction channels. Producers want to increase the number of sales channels. The Board had sought comments on the proposal.

The brokers argue auctions will mean better price realisation and improve the quality offered in these sales. Producers say the auction market doesn’t have enough capital to absorb the entire volume. They’d like the Board to open other channels, like direct online sales.

Anshuman Kanoria, chairman of the Calcutta Tea Traders Association, says the large buyers, such as Tata Tea, Hindustan Unilever and several others, are more comfortable in buying from auction sales. They say it ensures transparency and minimises the complexity of input tax credit.

“Routing the entire tea production through auction channels will make the process transparent, ensure better price discovery and improve competition,” Kanoria told Business Standard, presenting the brokers’ case.

A broker from Guwahati said routing of all produce – top grade whole leaf, broken, fanning and dust – though the auction system would pull in more buyers. “Most of the top quality tea is sold by producers to buyers directly via private sales. Hence, the quality made available in the auctions suffers, which brings down the effective price realisation from such sales,” the broker opined.

Board data shows the average prices in North Indian centres (the term refers to the non-South Indian centres, such as the east and northeast), during the first three months of 2017 were the same as in 2016. April onwards, prices dipped, with the average price till June down a little over four per cent. Large estate producers blamed the surge in low-grade tea from bought leaf factories in the auctions as the primary reason.

Brokers further alleged that some of the producers across the West Bengal-Assam belt resort to under-selling. Which creates an imbalance in the average pricing trend for a particular harvest or season. One could curtail this if the entire selling process is made transparent.

The Tea Marketing Control Order, 2003 (TMCO) – which laid the foundation for modern trade - was amended in October 2015, paving the way to a higher proportion in direct sales. The TMCO, with the amendment, reduced the compulsion of tea gardens to sending 50 per cent of the production, from the previous 70 per cent mandate, to auction houses.

Estate and large tea producers, instead of supporting a 100 per cent auction model, say they want the Board to diversify sales channels. Their primary claim rests on the “basis of free market access for fair price discovery”.

Producers say average price realisation from private sales is Rs 7-10 a kg higher than what a kilo fetches in the auctions. Better realisation from private sales helps in mitigating the rising cost of production, up about 30 per cent over recent years.

A second problem in routing the entire produce through auctions is on the market’s ability to absorb this. “For North India, 60 per cent of the production takes place in three months. If we put the entire produce under auction, availability of funds (with buyers) is in question. I think no buyer will be able to absorb the entire quantity put under the hammer,” says Azam Monem, chairman, Indian Tea Association.

Industry estimates suggest 65 million kg (mkg) and an additional 100 mkg pipeline stock is consumed each month in the country. However, when production peaks in the Assam valley during the June-August period, auction prices remain tepid. Prices rise during January-March, when the Assam gardens temporarily cease production.

A large estate owner says tea is a “different commodity” and prices cannot be generalised. These, depend a lot on the bush quality, quality of plucking and processing, and even the time and day of plucking. Silver Tips tea from Darjeeling, plucked in the moonlight, have fetched “outrageous” prices in private sales in the past.

Why brokers want it

Better average price realisation

Better quality of tea, which will result in facelift of the sector

Increased buyer participation

To increase their trade and margins

Will curb blended teas being passed onto consumers as single estate

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