The East African Tea Trade Association (EATTA) plans to automate the auction system to move its current open cry to e-auction, a plan that has been in the offing for some time now.
It is hoped that once the auction is digitalised, 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. 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 lower and not the optimum price possible. Nevertheless, the overriding influence on price discovery is simply the mechanism of total supply and total demand being the main determining factors.
This intention also gives false hope to tea producers who have been led to believe that the auction system is rigged to their disadvantage. It is purely a presumption that buyers will always want to buy their tea as cheaply as possible which is not necessarily the case as various market dynamics come into play. Any sort of collusion is simply illogical due to the competitive nature of tea buyers that compete on the global scale and are mostly judged by their market shares.
Voice recognition technology is becoming ever more advanced and could well be the most appropriate technology to embrace having the best of both worlds of the human competition to the completion of the bid which then translates into more efficient automated processes to post the bid.
Once the e-auction is elevated into a global platform will it not as well open up considerable risk and legal uncertainty? For instance, if a buyer defaults (unfortunately in certain parts of the world it can happen) who is then responsible to the producer?
All notable tea packers around the world are represented in the auction rooms at the same time. How will it work with differing time zones all the way through from New Zealand to North America? And, most important for the government, will players overseas on the global e-auction platform pay taxes? Could such a system not assist multinationals avoid taxes by trading without the responsibility that comes with being in the country to which you are domiciled?
Open cry system
India recently introduced the e-auction as its selling platform. The India model has different dynamics as most of the tea is consumed internally, therefore the vast majority of stakeholders operate under local jurisdiction. Currently, there are warning signs coming out of India that the e-auction may not be a solution to the shortcomings of the open cry system.
The Economic Times of India quotes Mr Paras Desai, Vice Chairman of Federation of All India Tea Traders Association (FAITTA) and executive director of Gujarat based Wagh Bakri group, asking for a rethink of the system. His reasons, from a number of articles that quote him, include the rushed nature of the system, delays on delivery notes and bank settlements once tea has been sold.
Of course these are operational issues of the system which might be sorted by tweaking the system. However, of note is that the prices of the tea sold from the open cry system and from the auction system is negligible, he says. Some speciality teas such as Darjeeling (which Kenya doesn’t produce) have seen their prices fall by almost a quarter!
It is therefore imperative that before we get ourselves into such a system, a proper study is done that may indicate whether the main concerns from farmers, which is primarily higher prices, will be realised when we move into digital selling.
From my 25 years of experience as a tea buyer, I am skeptical on whether the e-auction will result to better prices as opposed to the current system whereby market forces determine the prices.
—Mr Salaah Balala is the Managing Director of Africa Tea & Coffee Co. Ltd, one of the local tea buying companies in Kenya