 "Revoke mandatory auction order, firms tell Tea Board")
Faced with shrinking bottomline as a result of increasing input costs and price realisations which do not match expectations from auctions, the Indian Tea Association (ITA) has approached the Tea Board of India to withdraw its directive which makes it mandatory for the producers to sell 50 per cent of the garden's yield through auctions.
Instead, the association wants to opt for the direct selling route which it expects will give them higher prices for their tea. Furthermore, it doesn't want the Tea Board of India -- which regulates the trade -- to mandate any percentage of sales through the auctions.
An official in the industry, on condition of anonymity, said that around 60 per cent of the industry's annual produce of over 1200 million kg of tea is harvested in the months of September-November and it becomes cumbersome for the industry to put up such high volumes on the auction platform. Typically, for the third flush or the produce harvested in these months, the auction period lasts for just three months.
"When such high volumes are put up on the auction, there happens a demand-supply mismatch as a result of which the price realisation falls", an official from the tea industry said.
ITA reasoned that input costs during the last 10 years have increased at a Compounded Annual Growth Rate (CAGR) of more than 10 per cent per annum while tea prices have grown at a CAGR of only 6-7 per cent which is stressing the bottomline of the tea companies.
According to ITA estimates, 70 per cent of the input costs comprising of wage, fuel, fertilizer and others which are fixed in nature while the selling prices of tea are benchmarked with auction prices which are floating in nature. This results in the producers not being able to pass on the rising input costs to the buyer.
Sale Figures of new season Assam teas sold between Sale 14 to 31 have shown a decline with Assam CTC and Dust Teas fetching an average price of Rs.156.12 as against Rs.163.59 in the corresponding period of 2015.
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As per data from the Tea Board of India, during 2014-15, the average pan India auction prices stood at Rs. 127.62 a kilo which is nominally higher than the Rs. 125.59 auction price of 2013-14. The same dataset showed that during the September-November period in 2014-15, north India auction prices, on an average stood at Rs. 144.76 as against the average price of 141.86 in the year-ago period. In the southern zone, average auction prices for these three months showed an increase of seven per cent at Rs. 82.54 a kilo.
"As a matter of principle, the auction provides a platform for fair price discovery based on the market conditions", chairman of the Tea Board of India, Santosh Sarangi said.
According to Sarangi, there has been a 60 per cent production jump in Kenya which was supposed to bring down the global and domestic prices, however, it has not happened so.
During the August auctions this year, the average pan India price had increased nominally to Rs. 138.16 a kilo as compared the price of Rs. 137.42 in the similar month last year. In July this year, however, average all India auction prices increased 9.8 per cent to Rs. 146.60 from Rs. 133.54.
"One needs to keep in mind about the global situation in the tea sector. While auction prices should have been lower considering the bumper production in Kenya, it is just the opposite in the Indian auction centres", Sarangi added.
The ITA argued that the packateers and other buyers, who participate in the auctions are preferring to buy mid quality tea and the lower dust variants rather than high quality produce which puts stress on the company's earnings. Higher quality tea, besides fetching a higher bottomline, is also priced 40-60 per cent higher than the dust variety.
According to the industry body, sales of teas priced between Rs. 180-200 has declined by 15 per cent in the auction sales between 2014-2015 while teas, priced between Rs. 130-179 rose by two per cent. However, sales of the leaves which fetches the seller between Rs. 100-129 rose by 13 per cent over the last two years.
The association, which mostly represents the industry stakeholders from northern India is of the view that producers are compelled to sell teas well below the cost of production which will have serious consequences in the future on the sustainability of the industry.