Are tea auctions the right price discovery platform?

The Tea Board of India recently reinstated its 2015 ordinance, requiring tea factories to sell at least 50% of their products at auction. This has once again fueled the debate over the sanctity of tea auctions as an independent price discovery mechanism in a given supply and demand scenario.

The spirit behind compulsory auctions seems to be the idea that there is a lack of transparency in private sales and that, as a result, small producers are denied a fair price. When all production and sales are monitored and tracked by the Tea Board and with the introduction of the GST, it is intriguing that private selling price information still escapes transparency.

Retrospective auctions

Going back in history, the Tea Marketing Control Order (TMCO) had stipulated 75 percent of mandatory auctions in 1984. At the turn of the millennium, faced with new challenges on the price front, producers lobbied against the 75 percent of mandatory auctions, a platform they saw as not helping correct price discovery in a given supply and demand situation. Finally, the Ministry of Commerce repealed the 75 percent mandatory auction in 2003.

Following this, at the request of the producers, the Ministry of Commerce appointed an independent consultant to review the tea auctions in detail.

The consultant pointed to inherent flaws in the auction principles and process. The main obstacle they identified was purchasing by proxy; a buyer could buy on behalf of any number of buyers, stifling competition. Even in the electronic auction, you can say that there is no purchasing by proxy; but since everything is password-controlled, nothing prevents anyone from sharing their password with others. Thus, the issue of purchasing by proxy has not been resolved. After the introduction of electronic auctions, it was proposed to have pan-Indian auctions, to broaden the buyer base, but sales are still limited to local geographic areas.

The other problem is the division of the lots. Time and time again it turned out that the biggest buyer in the country was sharing lots with the smallest buyer. This again amounted to restricting competition. This is a problem that still remains unattended.

Another issue that interferes with finding fair prices, even on the electronic auction platform, is overcrowding at the last minute, before bids are finalized. This is different from the Japanese auction system, where time flies whether someone buys or not, and the price keeps going up.

And in terms of transaction cost, there is two weeks of cataloging time, two weeks in advance, which means more than four weeks before the producer makes their money. The two-week cataloging time was introduced at a time when it took years for tea and information to reach auction centers from the plantations. Today they arrive within 24 hours. It gives undue economic information to the buyer. He’s completely brewed and knows exactly how much tea there is in the country two weeks before the sale.

Additionally, there is a storage fee (teas must be stored within a certain radius of the auction center) and although ex-domain sale was recommended, this does not appear to be happening. Of course, there is the brokerage, and there are free samples – not insignificant amounts. Tea in India must be the only product in the world to offer free samples. In the end, the producer is not sure whether his tea is sold or not.

Tea auctions date back to when growers, buyers and brokers were companies based in England. It was therefore more of a transaction agreement than a scientific price discovery mechanism.

Historically, therefore, tea auctions were flawed as a platform for price discovery and heavily biased in favor of buyers. After the departure of the English, the tea trade passed into the hands of Indian trading houses. Indian buyers, of course, did not want to change the system because it was in their favor.

The producer, unfortunately, the underdog of the entire value chain, bears most of the cost. It has the highest cost share and the lowest price share in the tea value chain. The only thing that has value for the producer in the auction system is the fast and robust payment system. But that’s a huge trade-off for a low-cost discovery, especially since the producer is under constant financial pressure to deal with recurring costs in order to keep production cycles running.

Any move to private sales, exports or a brand image is a means of disintermediation and moving up the value chain. (Still, successful retailers don’t want to get bogged down in captive production because you can get teas cheaply in the market.) However, all of these channels use auctions as a benchmark price and when that price doesn’t. is not obtained scientifically, it adversely affects the prices of the rest of the chain for producers and favorably for buyers.

Need for prosecution

Which brings us to the basic question of the need for tea auctions. There is no auction for the coffee. There is no auction for rubber. The prices of these products are determined independently.

The deductions are not that the buyers are mercenaries. They serve their commercial objective, which is to source raw material at the lowest cost, in compliance with quality specifications of course, just as a seller wishes to sell his products at the highest price (product at the lowest price). cost). Buyers have investments, business risks and costs. However, they have the option of passing their costs on to the next level of sales, through independent sales channels, a facility not available to the producer at the main point of sale.

Experience has shown that attempts to reform auction principles and processes have led to unwillingness and avoidable conflicts of interest among stakeholders.

There is an independent auction platform that takes place in Jorhat. The Cochin auction center has completed testing of a system recommended by IIM Bangalore, which includes the installation of improving Japanese bids. Its entry into service is scheduled for early 2022. It will be interesting to see the progress, in terms of the ability to reform the auction system towards fair price discovery.

Otherwise, it will be imperative that tea prices are scientifically determined by market forces, regardless of the rules that govern them, in a given supply and demand scenario. This is crucial for an industry which supports a large number of jobs and whose costs, mainly labor costs, constantly exceed the price lines of commodities.

(The author is an independent consultant on tea supply and agribusiness and former president of UPASI).

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