The weekly Mombasa tea auction was recently named the biggest in the world and is the only centre in the world where teas from different countries are sold alongside each other, making it key to establishing global tea prices. In the last 20 years, the quantity of tea passing through the auction ahs risen four-fold, with every tea producing and consuming country focusing on the weekly auctions to gauge market trends and create benchmarks for international tea prices.
In the auction, any producer is allowed to market their tea to the local, regional and international market. Without the auction it would be difficult and expensive to do this.
The auctions are held weekly, with a main grades auction held on Tuesdays and secondary grades auction held on Mondays, from 9.30 am.
Tea factories and farmers do not sell their own teas, but are represented by a selling broker, who is responsible for cataloguing the teas for sale.
Teas in the auction are sold under Factory Marks, i.e. the names of the factories where they are produced. The tea is sorted into various leaf sizes, known as ‘grades’. These are known by standard abbreviations such as PF1. Each batch production of a single leaf grade is given a unique invoice number, before being packed into standard paper sacks, which in turn are put onto pallets.
The standard unit of tea is a single pallet of 20 packages, and a single invoice will cover a number of pallets of 20 packages. Each factory invoice is allocated a lot number, and this becomes the main reference for each tea in the auction.
Buyers are provided with samples in advance of the auction to that they can be measured and tasted.
The broker gives each lot of tea a valuation, based on the previous week’s price for similar tea, and any changes in quality and quantity.
The catalogues have a standard format: lot, factory mark, grade, invoice, number of packages, package type, net weight, weight per package.
The auction is held in public and is an ‘open cry’ system, with buyers competing for lots of tea by bidding against each other in an auction room.
Each lot is sold (“knocked”) to the highest bidder, as long as the price has reached a minimum level set by the broker.
Because most lots comprise multiple pallets, each lot can be divided between several buyers, each taking one or more pallets.
If a buyer only wants a single pallet, he is able to ask for a share of a lot that has bid on by another buyer before the tea is sold. If the main buyer agrees, the lot is divided.
This process of buyers sharing lots is what at times give the impression of ‘collusion’, but it is a transparent and fair way of aligning supply and demand.
To subdivide all auction lots into single pallets would increase costs and also the length of the auction, and experiments in various auctions around the world have shown that there is no impact on prices by doing this: levels are set by the balance of supply and demand whatever mechanism is used.
Buyers must pay for their purchases within ten days, and these payments are automatically transferred to producers through an electronic payment system.
Buyers in the auction are categorized into three kinds: those who buy and ship individual lots on orders from clients; those who buy teas for blending as bulk standards for clients; and those who buy on their own account for stock and trading.
Buyers put their own valuations on each tea, depending on its suitability for their requirements. They will then set their own quantity and price targets, or receive instructions from clients.
Prices rise when there is strong competition and fall when there is less demand.
Teas for which there is no demand, or where prices offered are not considered high enough by the broker, are “taken out”, i.e. not sold.
Among factors that affect price movements are: tea supply, which is affected by weather and harvests, buying activity in export markets, movements in other world auction prices, availability of cash, and currency fluctuations.
Although the teas on sale can at first appear similar, the differences can be significant. Even if teas have the same ‘grade’, other factors like taste, leaf size and appearance can make all the difference.
However, leaf density has been one of the biggest determinants of price. Teas that are light, having a high volume per 100g, cannot be bought for some customers who have strict standards: such leaves are therefore discounted or even ignored by buyers, which explains why certain farmers earn more than others in payments.
Differences in the taste and appearance of tea liquors also affect price differentials, and tend to follow regional patterns. Generally speaking, teas that have a more yellow/golden colour get higher prices than those with a browner/redder colour.
The auction is dominated by a few large buyers, reflecting the importance in Kenya of the key export markets of Pakistan, Egypt and the UK. The market is however very competitive, with some client contracts changing hands for a few cents difference in price. The job of the buyer is to meet his clients’ requirements as efficiently and as cheaply as possible, or risk losing clients to competing buyers.
Everything is public. Weekly prices are set in an open forum, with great transparency about who is buying and at what prices.
Everybody pays the same price for the same tea. Large multinational companies have no ability to negotiate lower prices.
Historically, the auction was initially known as The Export Auction System, and was started in November 1956 in Nairobi on a very small scale with only small quantities of secondary grade teas offered fortnightly under the auspices of the East African Tea Trade Association (EATTA). The bulk of East African tea production was directly consigned to the London Auctions.
The UK has traditionally been the top importer of tea in the world.
But, in time, East African Producer members considered it worthwhile to offer additional volume and quantity in the local export auctions. As quantities increased, the incentive grew for international buyers to open offices in Kenya. Gradually, more international buyers were attracted, spreading interest to markets other than the UK.
In 1969, it was decided by both producer and buyer members of the Association that, as tea was mainly warehoused, handled and shipped from Mombasa, the auctions should be moved from Nairobi to the Port of Mombasa.
For more information or inquiries about the auction contact:
Tea Trade Centre, Nyerere Avenue Mombasa Coast Province
P.O Box 85174-80100 Kenya
Telephone: +254 41 2228460 / 2220093
Cellphone: +254 733 208700
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