India’s Tea Board Explores Expanding Tea Auction

In bygone days, all the tea grown in India was sold either at local markets or at auction houses (initially in London and later, beginning in 1861, in Kolkata). Growers privately sold small quantities direct but buyers seeking large quantities bought all their tea at auction. Tea back then was almost entirely from tea estates. That is now rapidly changing. Small holders account for almost half (44 percent) of the tea grown in India. Demand is also changing as consumers seek specialty grades of loose leaf (orthodox) which is sold in smaller quantities at much higher prices than cut, tear and curl (CTC) grades. In response, India is exploring new ways to bring its teas to market. Prabhat K. Bezboruah, chairman of the Tea Board of India, has asked the tea industry to consider expanding requirements to sell tea at auction and to explore alternatives including an e-commerce portal. Currently growers are required to sell 50 percent of their tea at auction, a ratio some home to increase. "We haven't set any figure," said Bezboruah. Right now we are just asking for feedback regarding the sale of up to 100% of tea produced, he explained to World Tea News. "We want to see how the trade feels about the Sri Lankan system," he said, "But yes, with appropriate modification in the auction platform to render it more than an auction... rather an e-commerce portal, maybe 100% will be feasible," he said. Over the decades an extensive network was established with auction houses in every major growing region. Auction houses were automated in recent years and now account for more than 500 million kilos of the 1.3 billion kilos of tea India produces. Auction prices are set by experienced brokers and traders, a practice that tends to standardize quality and stabilized prices.

Today’s buyers are free to buy tea anywhere while registered growers are required to offer at least 50 percent of their tea through auctions. “This is a strange asymmetry,” says Bezboruah “You should either remove the requirement to sell 50% of the crop through auctions, or make it mandatory to sell everything through auctions. Because of the freedom they enjoy buyers are gaming the system to drive down prices in auctions. They don’t bid for their entire requirement in auctions, and then they buy cheaper directly from the estate at auction benchmark price,” he said. The decision dates to October 2015 when the Tea Marketing Control Order of 2003 was amended to require 50 percent of a registered grower’s output to be sold at auction. Regulators initially sought a threshold of 70 percent by volume but compromised at half. The intent was to open the auction to larger numbers of buyers and improve “price discovery” resulting in a better price. In the two years since that has not been the case. Growers instead sold their best tea direct whenever possible and directed their lower quality teas to the auction. Auction prices vary considerably but in general are declining. In Assam, which produces 70 percent of India’s tea, the share of cheaper varieties increased 13 percent last year. More troubling is the fact that up to 30 percent of the tea sent to auction houses is never sold. In response the tea board recently notified interested parties that it plans to reinstate mandatory sale of tea at auction. Only tea privately sold under contract would be exempt. The comment period closed the first of July and industry watchers are awaiting a formal decision.

Price Discovery Five years ago, the Nilgiri Specialty Tea Auction, conducted by the Nilgiri Planters Association, demonstrated the potential for price gains. To celebrate the Golden Jubilee of the Coonoor Tea Trade Association the 2013 special auction featured several teas that collectively sold for $4,600 (INRs300,000). Many of these specialty teas, including white and green teas, sold at record prices around $154 (INRs10,000) per kilo. The top seller, Glendale Silver Sparkles, brought $178 (INRs 11,600) per kilo. The upward trend has continued with prices nearly doubling. In March a 20kg lot from Badamtam estate, part of the Goodricke Group, sold for $198 (INRs 12,900) per kg. In April, a Japanese buyer paid $302 per kilo (INRs 19,363) for a special 5kg pack of handcrafted Darjeeling tea from the Makaibari tea estate in Kurseong ― a new record. In contrast, typical first-flush teas from Darjeeling bring an average price around $15 (INRs 970-1,050) a kilo at auction with better teas selling for $30 (INRs 2000). This is a big reason why private transactions and special auctions are increasing in number along with the average price per kilo. As a result, demand for tea at auction has dropped.

Auction Disruptions The transition to electronic auctions began in 2000 but the transition has not gone well. Disruptions in the banking systems needed to clear auction sales have been costly. The pan-India auction centers were not fully automated until last December when the 150-year-old open-cry Kolkata auction specializing in Darjeeling tea closed. The biggest winners of mandatory auctions may be small holders who rarely get paid rates approaching auction prices. Small holders are also the least likely to consistently meet the standards set by brokers. This is due to inexperience, the inefficiencies inherent in small lots, a lack of funds to nurture the tea plants, and slower transport to “bought leaf” factories that are required to post fair prices but typically offer less. Small holders were not allowed to cultivate tea for commercial sale until the mid 1980s when the Assam government first permitted individual farmers to grow tea. Today small holders, harvesting from younger stock, produce 572 million kilos per year. Unburdened by regulations and social obligations imposed on estates, small holders can sell tea profitably at $0.23 (INRs15) per kilo. The cost of production on estates ranges from $0.38-0.40 (INRs25-30) per kilo according to the tea board. Tea Board Chairman Bezboruah also questioned the need for separate auction centers in Kolkata, Guwahati, Siliguri, Coonoor and other locations. What is needed is “one auction open 24 x 7,” he said, adding that “entry barriers for new brokers should be reduced.” Sources: LiveMint, The Hindu Clarification: The original headline indicated the Tea Board of India was seeking to mandate 100 percent of India's tea be sold at auction. Prahbat Bezboruah on July 13 told World Tea News , "We haven't set any figure. Right now we are just asking for feedback regarding the sale of up to 100 percent of tea produced."