Are tea auctions the correct price discovery platform?

Dharmaraj Narendranath October 5 | Updated on October 05, 2021

Prices of coffee, rubber are determined independently without any auction

The Tea Board of India recently reinstated its 2015 order, mandating tea factories to sell a minimum 50 per cent of their produce at auctions. It has once again stirred up the debate about the sanctity of tea auctions as an independent price discovery mechanism under a given supply and demand scenario.

The spirit behind mandating auctions, seems to be the notion that there is lack of transparency in the private sales and therefore the small growers are denied a fair price. When all production and sales are being monitored and tracked by the Tea Board and with the introduction of the GST, it’s intriguing that private sale price information is still eluding transparency.

Retrospecting auctions

Going back in history, the Tea Marketing Control Order (TMCO) had stipulated 75 per cent mandatory auction sales in 1984. At the beginning of the millennium, faced with fresh challenges on the price front, producers lobbied against the 75 per cent mandatory auctions, a platform which they held as not helping correct price discovery under a given supply and demand situation. Finally, the Commerce ministry repealed the 75 per cent mandatory auctions in 2003.

Following this, at the behest of the producers, the Commerce Ministry appointed an independent consultant to examine tea auction in detail.

The consultant reported inherent lacunae in the auction principles and process. The primary impediment they identified was proxy buying; one buyer could buy on behalf of any number of buyers, stifling competition. Even in the e-auction, you can argue, that there is no proxy buying; but since it’s all password managed, nothing prevents anybody from sharing their password with the others. So, the issue of proxy buying has not been resolved. After the introduction of e-auction, it was proposed to have pan-India auctions, to widen the buyer base but sales are still restricted to local geographies.

The other problem is division of lots. Time after time, it was found that the biggest buyer in the country was sharing lots with the smallest buyer. This again tantamounted to restricting competition. This is an issue which still remains unattended.

Yet another issue that interferes with fair price discovery, even in the e-auction platform is the crowding at the last minute, before bid finalisation. This is unlike the Japanese system of auction, where the clock ticks, whether anybody’ is buying or not, and the price keeps going up.

And in terms of transaction cost, there is two weeks cataloguing time, two weeks prompt which means four plus weeks before the grower realises his money. The two weeks cataloguing time was introduced at a time when it took ages for the tea and information to reach the auction centres from the plantations. Today, they come within 24 hours. It gives undue economic information to the buyer. He’s completely prepared and knows exactly how much tea is there in the country two weeks ahead of the sale.

Additionally there is warehousing cost (teas have to be warehoused within a certain radius distance of the auction centre) and although ex-estate sale had been recommended, this doesn’t seem to be happening. Of course, there is brokerage, and there are free trade samples- of not insignificant quantities. Tea in India must be the only commodity in the world to give away free trade samples. At the end of it all, the producer is not sure whether his tea will be sold or not.

Tea auctions can be tracked back to the time when the producers, buyers and brokers were companies based in England. So, it was more a transaction arrangement than a scientific price discovery mechanism.

Historically, therefore, tea auctions were flawed as a price discovery platform and heavily biased in favour of the buyers. After the English left, tea business went into the hands of the Indian business houses. Indian buyers, obviously didn’t want to change the system because it was favourable to them.

The producer, unfortunately, the underdog in the whole value chain, has the bulk of the cost. He has the highest cost share and lowest price share in the tea value chain. The only thing that is of value to the producer in the auction system is the robust prompt payment system. But that’s a huge trade off for a low-price discovery, especially considering the producer is under constant financial pressure to meet recurring costs to keep production cycles churning.

Any move to private sales or exports or branding is a way of disintermediation and movement up the value chain. (Nevertheless, successful retailers don’t want to be bogged down with captive production because you can source teas at a lower cost from the market.) However, all these channels use auctions as the reference price and when that price is unscientifically arrived at, it affects the rest of the channel pricing adversely for the producers and favourably for the buyers.

Need for acutions

Which brings us to the fundamental question as to the necessity of tea auctions at all. There’s no auction in coffee. There’s no auction in rubber. The prices of these commodities are determined independently.

The inferences are not that buyers are mercenaries. They are serving their business objective, which is to source the raw material at the lowest cost, consistent with a quality spec of course, just as a seller wants to sell his produce at the highest price (produced at the lowest cost). Buyers have investment, business risks and costs. However, they have the option to pass on their cost to the next level of sale, through independent trade channels, a facility not available to the producer at the primary point of sale.

Experience has shown that attempts to reform auction principles and process have led to avoidable ill will and clash of interests amongst stakeholders.

There is an independent auction platform that’s happening in Jorhat. Cochin auction centre has completed trial run of a system recommended by IIM Bangalore, which includes the Japanese bid enhancement facility. It is scheduled to go live in early 2022. It will be interesting to see the progress, in terms of their ability to reform the auction system towards fair price discovery.

If not, it will be imperative for tea prices to be scientifically arrived at by the forces of market, independent of any rules that govern them, under a given supply and demand scenario. This is crucial to an industry that supports large employment and whose costs, primarily wage cost, are constantly out running commodity price lines.

(The author is an independent consultant on tea and agri-business sourcing and former President of UPASI ).

Published on October 05, 2021

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