Auctions bring many buyers and sellers on to a single platform, leading to transparent price discovery.

The Parliamentary Committee going into the tea industry, in a report tabled in the House a few days ago, has emphasised the need for taking a fresh look at the country’s tea auction system in general, and the e-auction system in particular.

The Committee feels that the present auction system does not always guarantee remunerative prices to growers, who often find it hard to pass on the cost to consumers.

The electronic auction system, the committee notes, causes problems for sellers not connected electronically. Besides, access to computers and Internet is a problem in many parts of the country. The committee has, therefore, urged the Commerce Ministry and the Tea Board to “revisit the present auction system”.

It is not clear yet what “revisiting the present auction system” implies. Does it mean closure of the system developed over past 150 years? Curbing it? Or improving upon it? What the government has in mind is, of course, anybody’s guess, but it is obvious that there is scope for improving on the present auction system.

For example, at Kolkata, e-auction is yet to start for Darjeeling tea, whereas it is already in place for CTC/dust and orthodox.

PARTICIPATION IN AUCTIONS

The 236-year old agri-commodity auctioning in India is perhaps the world’s oldest. It was started by British traders in Calcutta with indigo, followed gradually by other commodities such as jute and shellac.

Tea auction in Calcutta, also the world’s oldest, started more than 150 years ago in 1861. Time was when almost the entire production of tea was offered at the auction. However, the scenario changed over the years, with the volumes offered in auctions declining.

To arrest the trend, the Tea Board came out with the Tea Market Control Order (TMCO) in 1984, stipulating 75 per cent offering in auction. Soon after, the auction volume jumped, with some gardens offering as high as 90 per cent. Gradually, it declined, stabilising at around 60-65 per cent, largely due to the absence of a proper monitoring system.

In 2000, TMCO was lifted, much to the relief of many big producers.

At present, an estimated 54 per cent of the tea produced is offered in auctions in India, against 88 per cent in Mombasa (Kenya), 91 per cent in Chittagong (Bangladesh) and 96 per cent in Colombo (Sri Lanka). The auction system, it is felt in these countries, ensures proper price discovery, particularly for bulk tea.

The free interplay of supply and demand in an auction system creates a competitive environment so critical for determination of the correct price. But then not everyone in India’s tea industry will share the same view. There are many producers who stay away from auctions, arguing, ‘we reserve the right sell our produce in any manner we like’.

There are a few other characteristics of our tea auction system. Unlike other major tea producing countries such as Kenya and Sri Lanka, which have one auction centre, India has as many as eight — three (Kochi, Coonoor and Coimbatore) in the South and five (Kolkata, Guwahati, Siliguri, Jalpaiguri and Amritsar) in the North.

South Indian gardens participate more in the auctions (65 per cent of production) than the North Indian gardens (45 per cent), but the total volume of tea handled in three southern auction centres is small — about 132 million kg (mkg) or so out of the total auction sales of 534 mkg in the country.

In other words, the total North Indian auction sale is over 400 mkg. Also, while Kolkata auction centre handles all the three varieties of North Indian teas, namely, CTC/dust, orthodox and Darjeeling, the centres located at Guwahati, Siliguri and Jalpaiguri (recently started) auction mainly CTC/dust.

It, therefore, takes Assam orthodox at least a week and Darjeeling tea three to four days to reach Kolkata from the respective gardens, whereas the maximum time taken for tea produced in a remotest garden in South India to reach the nearest auction centre is 10-12 hours.

As a result, tea produced in an Assam garden, takes at least three to four weeks to hit the Kolkata auction. Assam is the single largest tea growing state accounting for half of the country’s total production of a little less than 1,000 mkg.

NOT TRANSPARENT

What are the alternatives to auction? Private sales, direct exports, direct to packet and retail trade and ex-factory sales. In each case, the number of buyers is limited, thus limiting competition. The other pitfalls are payments are not guaranteed, offerings are not regulated and there is total lack of transparency.

It is not possible to know at what price the deals have been struck and, in case of exports, if there has been under-invoicing and how much of the sale proceeds stashed away in foreign banks. In case of direct exports, the exporter is unable to reach various markets and has to continue with traditional outlets.

In ex-factory sale, it is impossible to reach a cross-section of buyers and quality cannot be guaranteed, as sampling is done directly by the garden. The producers are forced to compete with each other to attract buyers, whereas it should be the other way round: buyers should compete with each other for the right type of tea.

On the other hand, the auction system confers many benefits on buyers, growers as well as the government. Buyers have the widest selection of quality, all available at a single point, regular supply guaranteeing delivery, wide array of services at low cost and transparency in tracking purchases by competitors.

Producers benefit from maximum exposure of his produce to a wide spectrum of buyers, availability of a readymade platform to sell large volumes of bulk tea in a short time, nominal selling cost of 1 per cent, transparency in market movement and trends, timely and safe payments, reliable pricing, quality control benchmarking, against others.

In fact, the non-auction teas are usually benchmarked against the auction prices. If the auction system, therefore, does not yield the right price, which system will? The government, too, stands to gain from assured collection of taxes, instant availability of up-to-date data and infrastructure development creating employment opportunities.

(This article was published on August 30, 2012)
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