Tea farmers to lose out on good prices at tea auction

KENYA – Tea farmers and investors will miss out on the immediate windfall from higher prices at the Mombasa auction and weaker local currencies because of low volumes towards the close of the crop season in June.

This combination of factors means that growers and investors in listed companies with exposure to the sector can hope to reap the dividends of improved market conditions from next year, depending on whether the high prices and the shilling depreciation hold.

“Prices have a bearing on earnings though we experienced this late in the financial year so the impact will not be that significant,” said Lerionka Tiampati, Kenya Tea Development Authority managing director, adding that the impact of improved prices will be felt largely in the new financial year starting July 2015 should they persist.

Tea buying companies fear the prices could be short lived and the impact on future earnings limited by unfavourable weather causing low output.

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Tea prices at the Mombasa auction have shot to a two and half year high because of low supply due to the cold weather.

The prices have risen to a high of $3.09 per kilogramme from $2.02 at the beginning of the year while volumes over the same period have fallen from 8 million to 5 million kilogrammes.

The volumes are usually low during the cold season between June and August.  The shilling in July hit a three and half year low of Ksh100 to the dollar and has since traded below this mark at an average of Ksh101 last week.

KTDA outgrowers are paid on a monthly basis at the rate of Ksh14 ($0.14) per kilo of green leaf. They are also paid an advance (mini bonus) of Ksh5 ($0.05) per kilogramme of green leaf in April and a final payment, popularly known as bonus, in October.

The mini bonus of Ksh5 ($0.05) was not paid last year, owing to poor prices and a glut. The final payment is determined by returns for the whole season based on factors such as auction prices, cost of production at the factory company after deductions are made to cater for the monthly and advance payment.

More than 560,000 smallholder tea farmers deliver tea to 66 KTDA tea factories spread across the country.

Sasini, one of Kenya’s major tea and coffee producing company which is listed on the Nairobi Securities Exchange, said the effects at the Mombasa auction will not be felt in the market unless the prices remain stable for a longer period.

Sasini made a net profit of Ksh45.4 million ($454,000) in the year ended September 2014. The firm’s share price closed Ksh17 ($0.17) last week, registering a 4.22 per cent change year to date.

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“The shift in stocks’ volumes in the past few weeks indicates that investors are not moving money into agriculture but in to banking and manufacturing sectors despite the increase in auction prices,” said Godfrey Otieno, a market analyst at Sasini.

The firm has announced that it intends to sell one of its properties in Nairobi at a price of Ksh600 million ($5.9 million) to raise shareholder value and fund its expansion plans.

Unfavourable weather conditions this year are expected to affect tea output, according to the country’s meteorology department.

All tea growing areas experienced favourable weather conditions last year, leading to a bumper crop of over 1.1 billion kilogrammes of KTDA green leaf ,translating into 256 million kilogrammes of made tea, whereas total country production was approximately 1.9 billion kg (444.8 million kg of made tea).

“We are optimistic that the EAC farmers will get better prices this year compared with last year due to the dollar factor and demand that has surpassed the supply due to the unfavourable weather conditions,” said Edward Mudibo, (East African Tea Trade Association) EATTA managing director.

Eric Munywoki, a research analyst at Old Mutual Securities said the tea prices could boost companies performances helped by the strength of the dollar.

“Outgrowers could see an increase in bonuses while tea trading companies will register better profits translating into higher dividends. We have not seen any of them issuing a profit warning,” said Mr Munywoki. Although volumes have been low, companies are expected to experience better margins compared with last year.

Last year Williamson reported a loss of Ksh227.6 million ($2.3 million) compared with a Ksh740.7 ($7.4 million) profit a year earlier, while Kapchorua recorded a Ksh22.8 million ($0.2 million) loss from a Ksh126 million ($1.26 million) profit the previous year.

In a joint statement, the firms which share directors said weak prices through 2014 coupled with high supply, impacted on their performance.

“We expect to see better prices as we enter the new financial year as result of lower crop production. The share prices spells confidence among investors,” said directors of Williamson and Kapchorua.

August 14, 2015; http://www.theeastafrican.co.ke/business/Tea-farmers-to-lose-out-on-good-prices-at-tea-auction-/-/2560/2824692/-/li1mty/-/index.html

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