The search for new export markets for Kenya’s tea has began in earnest as prices fall this year.
Policy makers at the Agriculture ministry say they are scouting for new outlets for tea as volatile markets continue to hurt earnings.
This is partly due to a glut in production as well as over-reliance on traditional buyers in Egypt, Pakistan, Afghanistan, Sudan and the United Kingdom. The five countries take up 75 per cent of Kenya’s tea exports.
“We are exploring new markets in Eastern Europe and the Far East to stir demand, having recorded optimum performance in existing markets, including Russia and China,” Agriculture Secretary Felix Koskei said in an interview.
In addition to oversupply, which is global, it is the over-reliance on the five key markets that has dampened trade.
He said he was also targeting a possible bilateral agreement with Nigeria, as well as looking into establishing a value-addition plant with EAC members since tea is currently sold raw.
“The plant will see our teas processed and sold together,” added Mr Koskei.
Tea exports earned Kenya Sh106 billion in 2012, nearly equal to the foreign exchange it earned the previous year. The decline in prices is partly blamed on the political unrest in Egypt, which buys 20 per cent of Kenya’s tea. There is also turmoil in tea-buying countries like Syria, Pakistan and Sudan, which has reduced their purchasing power.
According to industry regulator Tea Board of Kenya, 2013 saw the highest production in three years, following a slump in the previous two years.
“Owing to good weather conditions mostly experienced in the first half of the year, cumulative production for 2013 peaked at 432.4 million kilos against 369.5 million kilos in 2012,” TBK said in a monthly report, noting that small-scale farmers account for more than 60 per cent of the country’s total production.
“This is one of the worst years. There has been no mini-bonus this year for small-scale holders, and chances are that the main bonus (second payment) will drop significantly,” said Global Tea and Commodities chief executive Peter Kimanga.
“There will be an oversupply with the onset of the rains. We are looking at depressed prices throughout the second quarter (April to June,)” said the Mombasa-based tea trader.
Europe, a major buyer of Kenyan tea, is emerging from winter, the heavy consumption period, meaning demand for the beverage will not level out additional supply. Consumers have also developed specific preferences for special teas.
Persistent low commodity prices at the Mombasa Tea Auction, which are at a six-year low, have dropped by up to 30 percent since July last year.
Global consumption has grown by two per cent. There was a significant oversupply in 2013. The supply of black tea, produced predominantly by Kenya, was 29 per cent greater than market demand, according to an analysis by United Kingdom’s Tea Infusions Ltd.
Last week, a kilo of made tea sold at an average of Sh179.26 ($2.32), against Sh272.79 ($3.15) for the same period last year, the lowest price since 2008.
The Kenya Tea Development Agency, the body that manages the small-scale tea sub-sector, says in that last steep drop in prices fell from Sh290.11 to Sh202.98.
The drop in global prices is expected to severely impact farmers’ annual returns. Last year, small- scale farmers who produce two thirds of Kenya’s teas, earned a total of Sh35.6 billion as a second payment (bonus) at an average rate of Sh31.65 per kilo of green leaf, against Sh33.9 billion earned in the 2011/12 financial year.
Already, listed producer Limuru Tea Company has announced a 10 per cent drop in revenue for the year ending December 2013, that was attributed a decline in the average price of the commodity in the reviewed period, from Sh236 in 2012 to Sh215 in 2013.
Another listed firm, Kapchorua Tea Limited which grows tea on large scale, yesterday issued a profit warning to its shareholders citing poor prices in the period ended March 2014.
Other large-scale tea farmers and NSE-listed agricultural firms like Williamson Tea Kenya and Kakuzi previously blamed the gloom on the sharp decline in world tea prices that depress earnings for out rower farmers.
“The company currently forecasts that earnings for the year ended March 31 could be at least 25 per cent lower than those of the financial year ended March 2013. The anticipated drop in earnings is a result of the declining tea prices this year compared to last year,” said the firm in a statement to the Capital Markets Authority.