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Assam tea association brews up storm over mandatory dust tea auctions

05:45 PM Apr 02, 2024 IST | NE NOW NEWS
UpdateAt: 05:47 PM Apr 02, 2024 IST
assam tea association brews up storm over mandatory dust tea auctions
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Guwahati: North Eastern Tea Association (NETA), an organisation of tea producers of the Northeast, has opposed the Central government’s gazette notification mandating a 100 per cent auction of dust tea grades from the Northeast.

According to the Tea (Marketing) Control (Amendment) Order, 2024, which will come into force from April 1, 2024, 100 per cent of dust-grade tea manufactured in a calendar year in its manufacturing units located in the geographical area of the states of Arunachal Pradesh, Assam, Bihar, Himachal Pradesh, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand, and West Bengal, is to be sold through public tea auctions. This does not apply to a mini tea factory.

Opposing the order, NETA chief advisor Bidyananda Barkakaty said, “We had opposed to the Tea (Marketing) Control (Amendment) Order, 2015, [notification dated April 15, 2015] and Tea (Marketing) Control (Second Amendment) Order, 2015, [Notification dated October 1, 2015]. The basic principle of our objection then and now is that since the government can’t guarantee the price realisation and the time taken for sale through auction, it should not intervene and should leave it to the producers to sell their produce in whatever manner producers feel comfortable.”

“The tea producers have huge risk and responsibility of paying wages to workers on time and also to small tea growers who sell their green leaf to tea factories. Therefore, managing the cash flow is a huge burden on producers. Any disruption or uncertainty in cash flow may invite social unrest and violence,” Barkakaty said.

There are about 10 lakh workers in direct employment in the tea industry of Assam and 1,25,484 small tea growers (land holdings below 10.12 hectares). The small tea growers produce 48% of the total green tea leaves produced in Assam.

Tea producers use three different channels to sell their produce – through public auction, directly from the factory through a one-to-one deal, and export directly or through merchant exporters.

“Public auctioning of tea is more than 150 years old (December 27, 1861 – the first day of tea auction in India) but for reasons cited in this letter it has never been able to attract tea producers to sell 100% of their produce through public auctioning,” Barkakaty further said.

“One of the major reasons for many producers not routing their produce through public auctioning is because this is a very INEFFICIENT mode of sale –it is time-consuming and expensive. Because of a limited number of buyers in the public auctioning system, many producers don’t get fair prices for their produce,” he said.

He said in the auction system, commission agents operate for several buyers thereby restricting competition and resulting in lower price realisation.

Auctions are much slower compared to direct sales and much more expensive and any rule which forces producers to sell through auctions will cause a working capital and cash flow crisis for the industry.

He also said direct selling (ex-factory) teas can be sold within a week of production. In auctions, the minimum time is 3 to 4 weeks after production, and very often even longer, because 30% to 40% of teas in auctions remain unsold every week.

If 100% Dust grades are made compulsory to be sold through auction then there would be an increase in the printing time which may go up to 6 to 8 weeks and thereby it would cause a huge cash flow stress to the producers.

“There is a huge selling expense for sales through auction centres which at times is as high as the margin for a manufacturing unit. The selling expense (brokerage, transportation, warehousing, insurance, interest cost etc.) is Rs 8 to Rs 10 per kg of tea if sold through Guwahati Tea Auction Centre (GTAC) and even higher if sold through Kolkata Tea Auction Centre (KTAC). This selling expense is 4% to 5% of the value of tea sold,” Barkakaty argued.

For unsold lots that get reprinted for sale, this cost is 6% to 8% of the value or even higher. Auctions are the most expensive way of selling tea. In the case of mandatory selling through auctions, the cost of selling will destroy the profitability and margins of the producers.

Almost all the tea producers have borrowings from banks in the form of term loans and cash credit limits. 100% auctions will negatively impact cash flows and profitability and this could also lead to an increase in NPAs and other defaults because of the industry becoming unviable. It will affect adversely the untiring efforts of RBI and our Government in reducing the NPA in the banking system.

“In 2023, we have observed that on average 30% to 40% of teas have remained unsold at GTAC in weekly sales. These unsold teas are reprinted three/four weeks later and such reprinted teas fetch much lower prices. This is an area of great concern because, with the arrival of substantially larger quantities of teas at the auction centres, this unsold percentage is most likely to go up substantially and thereby result in decreased prices of tea,” Barkakaty said.

“It is likely that there will be huge unsold dust-grade teas manufactured in April & May leading to a huge pile-up of stock at auction and warehouses. This will lead to a panic situation at the beginning of the season resulting in chaos in the market.

"Teas that remain unsold once in auction and get reprinted later, may mostly sell at considerably lower prices, even below the cost of production. This will lead to a reduction in income not only for the tea producers but also for the small tea growers. These small farmers in particular will be the biggest losers. When the dust market collapses, it will have a cascading effect on Leaf prices as well,” he said.

Barkakaty said most tea manufacturers purchase raw materials (green tea leaves) from small tea growers. These small farmers need to be paid on time. Sale through auctions may lead to delays in receipt of sale proceeds for the producers, who in turn shall not be able to make payments to farmers on time.

There is no guarantee of any kind of price realization in auctions and the fate of a producer is completely out of his hands. This is inherently unfair. Like small tea growers (STGs), bought-leaf factories (BLFs) are largely owned by first-generation indigenous entrepreneurs. Therefore, the sustainability of BLFs is as important as STGs. BLFs have given huge employment at the local level, generated economic activities and immensely contributed towards the economic development of Assam. The economic viability of BLFs depends crucially on the profitable disposal of its products.

“Many tea producers, by marketing skills, hard work and mutual trust, have been able to create their own mandis (markets) in different parts of India. Therefore, compulsory sale through the auction will deprive them from selling teas to those mandis which they have been able to create after lots of effort and investment,” he said.

“Teas in auction sell at a discount because of many reasons. One of them is the quality of sample packets used by auction brokers, which is very poor. As a result, by the time the buyers get the samples, the tea samples get deteriorate in quality by gaining moisture. This leads to poor price realisation for the producers,” he added.