by Dr Kipkirui Arap Lang’at, Managing Director, East African Tea Trade Association
The aim was to retain existing, familiar trade rules that have shaped the industry for so long, but to automate and accelerate the payment process, and enhance transparency for all stakeholders.
Tea is the second most popular beverage in the world. Only water has a higher global consumption than tea. It is estimated that somewhere between 18 and 20 billion cups of tea are drunk daily on our planet. Tea trading is a traditional industry, usually conducted through well-established channels using universally recognised conventions. Tea is often produced a long way from the central auction centre in Mombasa. Once picked, tea leaves are taken to the factory for processing, at which point the dried, rolled leaves can be sold at auction. Because of the long distances involved, most producers are far removed from the point of sale. Their tea is consigned to an appointed warehouse, and both the producer and warehouse owner are members of EATTA. Producers ask the broker, who acts as the epicentre of tea selling operations, to put a certain volume of tea in for auction. The broker then produces and circulates a catalogue to prospective buyers, and both the broker and potential buyers test the product.
At this stage, the tea can be auctioned. After the sale of tea at the auction, brokers prepare and send account sales reports to the producers, delivery orders to the warehouses and invoices to the buyers. Buyers then pay brokers for the full invoice value. On receipt of payment, as confirmed by the bank, the brokers issue copies of the delivery orders which are handed over to the buyers’ authorised agents. Buyers then use the delivery orders to collect the tea from producers’ warehouses. The brokers then remit the sale amount for the tea, less their commissions, catalogue charges and warehouse charges. Typically, it takes around 42 days between the date that the leaves are picked and the date that the producer receives payment.
Managing risk in the tea trading process
Although relatively lengthy, this system, which is universally accepted and consistent across the industry, has worked successfully for many years. However, following an isolated event in 2008 in which a broker did not remit funds to the producer (notably the only incident in 54 years of existence), together with advances in technology, we made the decision to review the risk profile of the trading mechanism and address any perceived shortcomings. While there is a high level of trust within the industry, with very principled people across the production and sales process, we recognised that we needed to protect the interests of everyone in the case of an anomaly. In addition, we recognised that this would be an opportunity to accelerate and automate processes.