The weekly Mombasa tea auction is at the center of the tea trade in Kenya, and an important reference point for the global tea industry.
It is the only centre where teas from different countries are sold alongside each other, and therefore helps to establish price levels and differentials for teas all over the world.
It is important to understand how the auction works, and this short guide is designed to help those visiting for the first time, and anyone else who needs a basic understanding.
Tea Production
It is useful to have a basic idea of tea production in order to understand the auction catalogues.
Teas are sold under Factory Marks, i.e. the names of the factories where they are produced. The tea is sorted into various leaf sizes, known as ‘grades’. These are known by standard abbreviations such as PF1. Each batch production of a single leaf grade will be given a unique invoice number, before being packed into standard paper sacks, which in turn are put onto pallets.
The standard unit of tea is a single pallet of 20 packages, and a single invoice will therefore be made up of a number of pallets of 20 packages. The number of pallets per invoice will depend on the total amount of leaf processed in the day, and the percentage of each grade.
Before the Auction
Tea factory companies do not sell their own teas, but each is represented by a Selling Broker, who is responsible for cataloguing the teas for sale.
Each factory invoice is allocated a lot number, and this becomes the main reference for each tea in the auction. Buyers are provided with samples in advance of the auction to that they can be measured and tasted.
The broker gives each lot of tea a valuation, based on factors such as the previous week’s price for similar tea, and any changes in quality.
The catalogues have a standard format,: lot, factory mark, grade, invoice, number of packages, package type, net weight, weight per package. The standard unit is a pallet of 20 sacks, and most lots will comprise multiple pallets.
The Auction
Before Automation
The auction was held in public and is an ‘open cry’ system, i.e. buyers competed for lots of tea by bidding against each other in an auction room.
Each lot was sold (“knocked”) to the highest bidder, as long as the price had reached a minimum level set by the broker.
Because most lots comprise multiple pallets, each lot could be divided between several buyers, each taking one or more pallets.
Buyers were required to pay for their purchases within ten days, and these payments were automatically transferred to producers via an electronic payment system.
After Automation
The automation was in a view of enhancing efficiency with which teas are sold through the auction. Developed over 3 years, the first sale went live on 27th May 2020.
The system incorporates four modules which include:
- Membership module – This covers first-time application, renewal of membership, and management of membership issues.
- Catalogue module – The module covers Tea dispatch by producers. Once the producer has dispatched the teas, the broker consolidates the teas from the different producers and prepares a closing catalogue. The warehouse has also the mandate of updating received teas in the iTTS once they physically arrive at the warehouse. On the week before the auction, the broker publishes a sale catalogue that has the valuations and their comments on the teas. This is the final catalogue that is used for auction. The buyer has also a feature to preset prices and input their comments.
- Auction module - This is a transition in the actual bidding process from the manual outcry system to a fully automated system. It is a trade engine with different logic to accept the highest bid value offered by Buyers and declare the sale.
- Business module - Supports generation of sale Invoices by the brokers and payment references by the buyers. The module also integrates with Bank systems to get confirmation on the payment receipt. When payment is updated on iTTS, the broker Generates Tea Release Documents and Delivery orders. Once the buyer has received the delivery order, they generate Loading Instruction which is sent to the warehouse to enable the release of teas. The warehouse releases teas based on the loading instruction and issues a Release Certificate.
iTTS Process Flow
Benefits of the integrated tea trading system
- Central Data Repository System.
Data mining from the online auctions which will provide EATTA and its members, as well as
other tea stakeholders in the region and globally with useful data to analyze market trends,
analyze market dynamics and respond to demand promptly. - Increased Transparency and visibility
Farmers will be provided with accurate information on the prices their teas fetch at the
auction. Buyers on the other hand will be able to compare prices and various teas on sale. - Ease and convenience of selling teas.
The Integrated Tea Trading System can be accessed from remote locations and therefore
authorized buyers can participate in an auction at their comfort. This is a departure from the traditional auction that would require a physical presence at the auction floor in Mombasa. - Increased buyer participation
There is an opportunity for more Buyers participation. Participation of the buyers is not
restricted by the physical size of the auction floor. - Introduction of multi-auction system
With the upcoming initiatives on running parallel auction systems, more volumes will be
traded on within the shortest time possible.
Just like the manual auction, each lot is sold (“knocked”) to the highest bidder, as long as the price has reached a minimum level set by the broker.
Because most lots comprise multiple pallets, each lot can be divided between several buyers, each taking one or more pallets.
Buyers must pay for their purchases within ten days, and these payments are automatically transferred to producers via an electronic payment system.
Buyers
Buyers fit into 3 broad categories:
- Those who buy and ship individual lots on orders from clients.
- Those who buy teas for blending as bulk standards for clients.
- Those who buy on their own account for stock and trading.
They will put their own valuations on each tea, depending on its suitability for their requirements. Buyers will then set their own quantity and price targets, or receive instructions from clients.
Market Prices
Buyers operating in the auction will have different quantities to buy, and different price limits. The bidding for each lot continues, and the price continues to rise, until some buyers’ limits are reached and the demand for tea reduces to the amount of tea on offer.
The auction follows the normal pattern of supply and demand: prices rise when there is strong competition and fall when there is less demand.
Teas for which there is no demand, or where prices offered are not considered high enough by the broker, are “taken out”, i.e. not sold.
Key factors affecting price movements are tea supply (weather and crops), buying activity in export markets, movements in other world auction prices, availability of cash, and currency fluctuations.
Why do teas fetch such different prices?
Although the teas on sale can at first appear similar, differences can in fact be significant. Even if teas have the same ‘grade’ (e.g. PF1), this is a nominal way of categorising teas and the grades themselves have no strict definitions. Two teas graded PF1 can easily have very different taste characteristics and even a different leaf size and appearance.
Leaf density is becoming increasingly important in key markets, where some customers have very strict standards. Teas that are light (i.e. have a high volume per 100g) cannot be bought for these customers and are therefore discounted or even ignored by buyers.
Differences in the taste and appearance of tea liquors also affect price differentials, and tend to follow regional patterns. Generally speaking, teas that have a more yellow/golden colour get higher prices than those with a browner/redder colour.
Is there real competition between buyers?
The Mombasa market is dominated by a few large buyers, reflecting the concentration of Kenya export volume into the key markets of Pakistan, Egypt and the UK. The market is however very competitive, with some client contracts changing hands for a few cents difference in price. The job of the buyer is to meet his clients’ requirements as efficiently and as cheaply as possible, or risk losing clients to competing buyers.
Division of lots between several buyers (“sharing”)
This is probably the aspect of the Mombasa Auction (and other tea auctions around the world) that causes the most misunderstanding.
Teas are sold in invoice units comprising multiple pallets of 20 packages: this reflects the way tea is produced in the factories.
If a buyer only wants a single pallet, he is able to ask for a share of a lot that has bid on by another buyer before the tea is sold. If the main buyer agrees, the lot is divided. The bid price continues to rise until the buyer is willing to divide.
This process of buyers sharing lots is what can give the impression of ‘collusion’, but it is a transparent and fair way of aligning supply and demand.
To subdivide all auction lots into single pallets would increase costs and also the length of the auction, and experiments in various auctions around the world have shown that there is no impact on prices by doing this: levels are set by the balance of supply and demand whatever mechanism is used.
The strengths of the auction system
- Everything is public. Weekly prices are set in an open forum, with great transparency about who is buying and at what prices.
- Everybody pays the same price for the same tea. Large multinational companies have no ability to negotiate lower prices.
- Smaller producers can participate. It is possible for any producer to market their tea to the local, regional and international market. Without the auction it would be very difficult and very expensive to do this.
- Smaller buyers can participate. All producers sell a proportion of their tea at auction, so even the smallest buyers can have access. The ability to divide lots also means tea can be bought in much smaller quantities.
- It is highly efficient. It is a very effective way of moving large volumes of tea from producers to buyers, and helps producers’ cash flow.
