Informist, Monday, Jan 15, 2024
By Avishek Rakshit
KOLKATA – After calling off the Bharat auction system in just six months of its introduction in east and north-east India, the Tea Board India is planning to come up with a new pan-India auction system built on the lines of the English auction system, sources aware of the development told Informist.
The Tea Board has set up a committee under former managing director and chief executive officer of National Commodity & Derivates Exchange R. Ramasheshnan to suggest improvements in the auction system, the sources said. Other members of the committee are Indian Institute of Management – Bangalore Professor Sreelata J. and Tea Board's Controller of Licensing Rajanigandha Seal Naskar, the sources said.
The committee, which will consult industry stakeholders, is expected to submit its recommendations early next month, the sources said. The terms of reference of the committee include suggesting improvements in the e-auction platform of the Tea Board in terms of price discovery and examining the role of the board in regulating tea auctions in the country.
Tea plantation companies have been complaining about the outdated tea auction system in India which is affecting price realisations and have been seeking a new mechanism.
“Prices in the auctions are unremunerative, and they declined under the Bharat auctions which, thankfully, have been called off,” a senior official at a tea plantation company, which has gardens in Assam and West Bengal, said. "We need to not only recover our costs but also make some money (from sales at the auctions) which will keep us interested in the tea business."
Although the Tea Board has mandated that at least 50% of the tea produced in the country should be sold via auctions, tea producers seldom follow this rule. Last year, only around 45% of the total annual production of 1,366.4 mln kg was sold through auctions.
The Bharat auction system has been replaced with the older English auction system till the time the Tea Board finalises a new auction mechanism. The Bharat auction system was discontinued in October.
Officials at tea plantation companies and owners of tea estates complained that under the Bharat auctions, tea prices were unremunerative as small buyers could not participate and thus brought down competition.
Hindustan Unilever Ltd, Tata Consumer Products Ltd, and Gujarat Tea Processors & Packers Ltd – the three largest tea retailers in the country – are the top three buyers in the tea auctions. These companies together hold sway in the auctions, industry officials said.
“However, there are many small buyers who pick up select lots and thus price in the auctions depends on them to a large extent,” a leading tea plantation company owner from Assam said. “In the absence of these smaller buyers, the (auction) market was becoming extremely dependent on the three leading tea buyers leading to unremunerative prices.”
Tea Board data shows that ever since the Bharat auction system was introduced in east and north-east India, average monthly prices fell sharply year-on-year every month. In October, when it was finally discontinued, average tea prices in the auctions were lower by nearly 7% year-on-year at 193.5 rupees a kg in east and north-east India. At the time of its introduction in April last year, tea prices in these auction centres fell by over 14% year-on-year to 201.3 rupees a kg.
Rating agency ICRA said that the all-India auction prices of orthodox, or whole-leaf tea during Jan-Oct declined by 51 rupees a kg, or 21% on a year-on-year basis. The produce from West Bengal and Assam were the worst affected.
However, even after the Bharat auction system was discontinued, prices continued to fall at the auctions.
Tea plantation company owners blame the fall in prices partly on a drill-down effect of the erstwhile Bharat auction system, and partly on the quality of the produce. In winter months, north Indian plantations stop production and the tea offered at the auctions in east and north-east India are the carry-over stocks primarily from the monsoon season. This tea is usually priced lower than the peak-season summer teas.
“The introduction of the Bharat auction system is likely to have weighed on the auction prices in the current year. Restrictions on the division of lots, which limited participation by smaller players, and inflexibility in revising pre-entered bid prices during the auction process have reportedly led to an inefficient price discovery,” Sujoy Saha, vice president and sector head of corporate sector ratings at ICRA said. “The Tea Board has reverted now to the earlier English auction system. While the trend in prices in recent auctions, post the change, seems to be encouraging, the long-term impact of the same remains to be seen.”
ICRA in December downgraded its outlook on the bulk tea sector to negative from stable.
In the Bharat auction system, bids from the buyers were entered into the auction platform before the lots were auctioned. The buyers placed these bids based on the samples they received from the tea brokers. When the auction went live, the highest bidder won the lot, which comprised 30 packages of tea.
However, in the English system, which was in vogue in the country’s tea industry for over 160 years, the buyers had to place their bids live and were aware of the live bids placed by the competitors.
“Hence, in the English system, the buyers had to compete in real-time for the tea while under the former system (Bharat auction system), buyers would place their pre-decided bids,” the plantation company owner from Assam said.
While the tea plantation companies are content, for the time being, with the reintroduction of the older English auction system, they said more buyers need to participate in the auctions for better price discovery.
“The Tea Board, with its vital role in promoting and developing the tea industry, should shift its focus and efforts away from transactional matters like auctions,” Ajay Jalan, president of the Tea Association of India said.
According to the Tea Association of India, changes in the Tea Marketing Control Order, which regulates tea sales, are needed. Advocating opening up tea auctions to a broader spectrum of participants, the association said that the Tea Board needs to transition itself into a regulatory role akin to that of the Securities Exchange Board of India.
“This strategic shift is expected to spark healthy competition among auctioneers, leading to the development of smarter, more efficient auction systems,” Jalan said. “Such competition is not just beneficial but essential, as it will drive auctioneers to add more value, thereby contributing significantly to the growth and dynamism of the entire tea industry.”
Small tea growers, who account for 55% of the country’s annual tea production, are also in favour of reforms in the tea auctions.
“CISTA (Confederation of Indian Small Tea Growers Associations) always welcome the initiative for reforms of the auction system which needs to be beneficial for price hike of made tea,” its President Bijoy Gopal Chakraborty said.
Plantation company owners are equivocal that a change in the auction mechanism is needed to boost competition, which will lead to better price discovery. End
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