Kenya Considers Scrapping Minimum Tea Price Amidst Growing Unsold Stocks

Kenya is contemplating the removal of the minimum tea auction price set in 2021 as it grapples with an unprecedented stockpile of unsold tea. The government’s latest move, driven by a request from Prime Cabinet Secretary Musalia Mudavadi, reflects growing concerns over the policy’s effectiveness and its impact on the tea industry.

Currently, the country faces a staggering 115.2 million kilogrammes of unsold tea, accumulated since last year. The Ministry of Agriculture has been instructed to provide a detailed report on these unsold stocks. This includes information on their shelf life, the space they occupy, warehousing charges, and the lessors of the warehouses holding the unsold tea. Mudavadi’s inquiry aims to uncover who will bear the warehousing costs and to assess the Kenya Tea Development Agency’s (KTDA) indebtedness to farmers and financial institutions.

The minimum price policy, which set a reserve price of $2.43 per kilogramme for processed tea from KTDA-affiliated factories, was implemented to shield smallholder farmers from market volatility. Introduced amid a global tea price slump, the policy was intended to prevent losses when auction prices fell below the $2 mark. KTDA, representing up to 65% of Kenya’s smallholder tea production, has a significant influence on the Mombasa weekly auction.

However, the policy has faced significant criticism for failing to achieve its objectives. Critics argue that it has led to a market surplus and disrupted the dynamics of tea pricing. Mudavadi’s office reported that around 20 million kilogrammes of tea produced in 2023 remain unsold and are incurring ongoing warehousing charges. Moreover, as of June 2024, approximately 95.2 million kilogrammes of fresh tea also remain unsold, affecting the producers’ ability to compensate farmers promptly and impacting their income.

The policy’s shortcomings are attributed to several factors. Primarily, it failed to address the underlying issue of declining tea quality, which is a major contributor to the low auction prices. By not incentivizing quality improvements, the policy did not rectify the root cause of the price decline. Additionally, the minimum price was applied only to KTDA teas, excluding independent tea factories, thus creating an uneven playing field. This discrepancy has made teas from independent factories more attractive due to their flexible pricing, leading to a preference for these teas over KTDA’s offerings. As a result, KTDA teas have accumulated unsold at auctions, further exacerbating the market glut and driving down prices.

In response to these challenges, President William Ruto’s administration is considering reforms aimed at enhancing farmers’ earnings. The tea sector, along with coffee, has been identified as a key area for these reforms. Investments PS Abubakar Hassan has indicated that discussions with sector stakeholders will be held to explore the possibility of repealing the minimum price regulations.

Tea remains a crucial foreign exchange earner for Kenya, with an estimated annual value of Sh188.7 billion as per the Economic Survey 2024. As such, any changes to the minimum price policy will need to carefully balance the interests of farmers, industry players, and the broader economic implications.

In conclusion, Kenya’s potential move to scrap the minimum tea price highlights the complexities of regulating agricultural markets. As the government seeks a solution, the focus will be on addressing the underlying issues that have led to the current stockpile and exploring measures to ensure a more sustainable and equitable tea industry.