EAC: A pricey cuppa tea

Kenya, Malawi and Rwanda, some of the world’s biggest producers of tea, have joined three other producing nations to form a ‘tea cartel’ that aims to eventually set the international prices of the beverage and control other factors of production. Will the cartel work this time around, having failed to do so on previous occasions? Report by Wanjohi Kabukuru.

One year ago, at a tea producers’ meeting in Colombo, the Sri Lankan government, together with the other big tea exporters, India, Indonesia, Malawi, Rwanda and Kenya announced the formation of the International Tea Producers Forum (ITPF). This was immediately seen as the formation of a tea cartel along the lines of the Organisation of Petroleum Exporting Countries (OPEC).

In 2012, UN Food and Agriculture Organisation (FAO) statistics showed that tea is the world’s favourite drink. According to FAO, demand for tea exceeded supply, leading to higher prices. In the last decade, global tea production has risen by 40%, averaging 4.3m tonnes in 2010.

However, sceptics dismissed the organisation as nothing more than a “storm in a tea cup”. A year later, it is clear that the concept of the Forum seems to be brewing and blending nicely. It is now emerging that ‘tea talks’ formed a critical part of the Sri Lankan leader’s visit to Kenya in December 2013.

During Kenya’s 50th anniversary celebrations, Sri Lankan President Mahinda Rajapaksa was a state guest of his Kenyan counterpart, President Uhuru Kenyatta. Before he left the country, President Rajapaksa had signed several deals with the Kenya government, one of which was an agreement on tea.

The pact aims to take a ‘collective approach to tea markets’, value addition and experience sharing. The leaders of Rwanda and Malawi, which are also members of the ITPF, held similar trade talks with Kenyatta on the sidelines of Rajapaksa’s visit. Both Malawi and Rwanda have raised diplomatic and trade relations with Kenya as their blossoming tea industries depend on the East African Tea Trade Association (EATTA), which runs the Mombasa Tea Auction, for the sale of their tea. The Mombasa Tea Auction, where $25m worth of tea is traded every week, is the largest in the world by volume.

As of December 2013, the average tea price was $2.36 per kilo at the Mombasa auction. According to the Kenya Tea Development Agency (KTDA) this represented a 30% drop since July to November period when the price of tea had averaged $3.62 per kilo.

Collectively the six ITPF members, with China, control more than 80% of global tea production, accounting for an annual average of 1.9bn kilos. China, which holds an observer status in ITPF, is the world’s leading producer of tea with an annual output of 1.4bn kilos.

Over the last five years, Kenya has produced on average, annually 360m kilos of tea. More than 60% of Kenyan tea is grown by smallholder farmers in the cooler Kenyan highlands. In 2013 the Tea Board of Kenya (TBK) had projected tea earnings of Kshs116bn ($1.33bn) up from $1.30bn in 2012 owing to favourable weather. Kenya is the world’s largest producer of black tea. In 2013 Kenya produced 365m kilos of tea and Sri Lanka produced 337m kilos.

Sri Lanka has nursed this ambition of a tea cartel since 1994 when it first mooted the idea and proposed that tea prices be set by the producers rather than the market. The idea was not taken seriously then. But attempts to regulate or set international prices go back to the 1930s when, threatened by price depreciation at the time, the three main tea producers of the era, India, Dutch East Indies (today Indonesia) and Ceylon (Sri Lanka) formed the International Tea Agreement (ITA) to halt falling prices. India and Ceylon were then part of the British Empire.

The trio achieved initially achieved their aims by reducing output. But non-compliance with the quotas agreed upon led to serious disagreements between the British and the Dutch producers leading to the collapse of the ITA two years later.

After a series of negotiations, the ITA was revived in 1933 under the International Tea Committee (ITC), which was to oversee an ITA regulation scheme on export quotas. These quotas, which could later be traded, were imposed on tea firms. The participating countries limited acreage expansion and at the same time made the quotas legally binding. It worked and to this day, the 1933 format is cited as the first successful ‘tea cartel’ which raised tea prices in favour of producers.

The Second World War, however, completely altered the terrain and in 1955, the ITA was not renewed. The concept has been given new life by the 2013 agreement. The ‘cartel’ at it is being dubbed, will seek to overcome random pricing as a result of the lack of standardised grading and the lack of a futures market for tea as compared to other commodities such as rubber and sugar. But complication could arise if tea-producing companies, whose headquarters are mostly in Europe, refuse to go along.

Industry analysts have called for caution in the setting up of the cartel as standardised grading of tea is difficult as each country produces its own unique tea blend. Second, they point to past failures by other cartels such as the Thailand and Malaysia led the rubber producers’ organisation and the coffee producers’ organisation after members felt that they were not aggressive enough in controlling prices and ensuring favourable returns to producers.

Nevertheless, a constitution for the ITPF has already been adopted and what remains now is the ratification by the respective governments.