The Explainer: How KTDA Tea Bonuses are calculated

The Kenya Tea Development Agency, KTDA, collects, processes and sells tea leaves on behalf of farmers in Kenya. The farmers in turn receive monthly payments and a one off payment per year called the ‘tea bonus’.

Teas from different factories fetch varying prices at the markets – either through the auction or direct sales. This difference is driven by consumer preference with buyers willing to pay a higher price for teas from some factories due to factors such as type of soil, altitude, climate and rainfall quantity.

The buyers are willing to pay a premium on the teas from these factories (regions) hence the farmers in these areas will often receive better returns for their produce compared to others.

Other factors that to a lesser extent influence price include quality of farm management practices such as application of fertilizer, pruning and plucking.

At the factory level, the revenue generated are broadly divided between the costs of running the factory and the growers’ payment.

The farmers’ payment depends on how much the factory’s teas fetched at the market and how much of those revenues was used to run the factory in that financial year.

Factories have multiple expenses including labour, electricity, fuel wood, leaf collection expenses, packing expenses and administration costs.

Financing costs Factories with development projects that are financed by loans will incur higher finance costs (loan repayment costs) than those which are not expanding. Given the current interest rates regime, such costs can be substantial.

Such projects include adding extra production lines, establishing satellite factories and setting up small hydropower stations. On the other hand, factories with healthy cash ows and which have no need to borrow will ultimately invest their surplus and earn more income.

Farmers’ returns are also affected by how efficient a factory is. The cost of production varies from factory to factory based on labour and energy efficiencies. Factories process varied volumes of tea depending on the size of the catchment areas and the volumes of tea produced. This deter-mines factory capacity utilisation and hence cost efficiency.

A factory that runs at capacity or near capacity all-year round will be more efficient and thus will spend lesser amounts in processing a kilo of tea.

An efficient factory will spend less in operational costs and leaves more for farmers’ pay-out. Tea prices are also very volatile based on global demand and supply. Kenya competes on the global scale with other producers like India and Sri Lanka.

An overproduction in any of the primary exporters means that the global prices fall and this affects the amount of money that buyers are willing to pay and ultimately how much the farmer will earn at the end of the year.

Curbing operational expenses as a managing agency, KTDA is involved in ensuring factories reduce their costs of operation by investing in the tea value chain via subsidiaries that either enhance services or reduce costs for farmers.

KTDA has also been working with factories on various projects like energy efficiency that has yielded an average 15 per cent reduction for each kilo of processed tea in the last four years.

The Agency is also encouraging farmers to grow other crops that will supplement their incomes in times when tea prices or income is down, as happens from time-to-time.

At the same time, factories have instituted measures to manage costs in factories, key among them investment in hydropower that will considerably reduce the cost of energy.