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Why Tea Prices Continue To Fall

by Wangah Wanyama
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By Mildred Barungi

Mildred Barungi

We should be collectively concerned about tea farmers’ outcry over low green leaf prices

Recently, in the newspapers, it was reported that tea farmers in Kigezi sub-region are counting losses following price cuts by proprietors of tea factories. That, the farmers were demoralized and were calling upon government to intervene and stablise prices. It should be acknowledged that the challenge of low prices per kilogram of green leaf is not unique to farmers in Kigezi but also affects those in other tea growing sub-regions like Tooro. This outcry is a matter of national importance and should be treated with the seriousness it deserves. Why? Tea is one of the commodities selected to be supported by Government to drive Uganda’s agro-industrialisation agenda; It is one of the key agricultural export revenue earners; tea growing is a source of livelihood for many households in the country; and tea factories create enormous direct and indirect jobs, hence contributing to reduction of joblessness, a development challenge that remains at large.

Why are prices of green leaf inappreciably low? Attempting to explain the true causes of the painfully low prices received by farmers is quite complex; it is likened to the chicken-and-egg dilemma. Whereas farmers blame factories for setting the prices of green leaf so low, the factory operators blame it on the high costs they incur in processing the green leaf into made tea. The unit cost of production of made tea is in part driven up by the unstable supply of electricity (a relatively cheaper energy source) which forces factories to turn to a more expensive alternative, the use of generators to operate tea processing lines.

On the other hand, factories receive low prices for the made tea exported to Mombasa Tea Auction, the only major export destination market for most of the made tea produced by factories in Uganda. The high unit cost of production of made tea, coupled with the low sale price, leave factories with no option but to offer farmers a low price for the green leaf, if they (factories) are to remain in operation. At this point, you should appreciate why the issue of low prices of green leaf should be looked at from both the farmer and the factory perspective in order to come up with a holistic package of solutions.

So, why do factories receive low prices for the made tea in the export market? The reason has a lot to do with farmers; they supply poor quality green leaf. Instead of farmers harvesting the young tender two leaves and one bud as recommended, they pluck whole branches with woody stems. Indeed, many factories report that less than 30% of the total green leaf supplied by farmers is of acceptable quality. Consequently, after processing, made tea of primary (premium) grades make up a small proportion of the total volume of made tea. Most of the made tea gets classified under secondary grades which attract lower prices. Being rational business operators, factory Managers cannot obviously pay farmers a good price for green leaf when they themselves are earning low prices for the made tea.

What are the implications of inaction in the face of low prices both for green leaf and made tea? Failure of key stakeholders in the tea sub-sector to address the constraints faced by farmers and tea factories has got several implications at household (farmers), firm (factories) and national levels. If green leaf prices remain low and continue to drop, farmers will be discouraged to invest in good agricultural practices including the use of fertilisers, which are actually pricy. Consequently, productivity and production of green leaf will reduce and so will its quality. Farmers will have less green leaf to sell to the factories; coupled with the low prices, their incomes will dwindle. On the side of factories, receipt of less green leaf that is even of poor quality will result into operational inefficiencies such as reduced capacity utilization and increased unit cost of production, moreover, of largely poor quality (secondary grade) made tea. Eventually, the factories will get a low price at the export market and will not be profitable. Failure of tea factories to make adequate profits is bad news, especially for UDC, because the corporation has ordinary shares is some of them and has the duty to protect government’s interest by ensuring these businesses are profitable and sustainable. Ultimately, at national level, the low prices of made tea directly translate into reduced export earnings and worsen the already unfavourable balance of trade position.

Having belaboured the explanation as to why we collectively should be concerned about tea farmers’ outcry over low green leaf prices, I propose the following should be given serious consideration. First, Government through the MDAs responsible for electricity generation, transmission, distribution and sale, should ensure stable supply of electricity to tea factories and at low prices. H.E. the President recommends in his various speeches that the average energy charge for industrial consumers should be reduced to at least 5 USD cents per kWh. Second, the Ministry of Agriculture (MAAIF) through its various programmes should work towards increasing farmers’ access to subsidised quality agro-inputs, especially fertilisers. Third, tea factories should establish fertiliser funds by retaining a small portion of payments due to farmers for every kg of green leaf. The factories will then use the pooled funds to do bulk fertiliser purchases at reduced prices. Lastly, MAAIF should expedite the passing by Parliament of the tea policy, and implementation of the strategic actions therein. Policies should never be mare intentions.

Mildred Barungi, PhD is Manager Research, M&E at Uganda Development Corporation (UDC)

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