TRENDS AND PRICE FORMATION MECHANISM IN INDIAN TEA AUCTIONS

Abstract

Tea auctions have played a key role as the main vehicle for primary marketing of tea in India for ever since the first Indian auction centre was set up in Kolkata in 1891. Price formation process in tea auction is itself a complex process and the outcome is a result of a complex interplay of various factors. The present study tries to find out factors which play an important role in the price formation mechanism of Indian tea. For the country as a whole more than 50 per cent of sales are routed through auctions. Auction buying is much more fragmented and there exists a sizable gap between wholesale and retail prices. Southern producers are relatively more dependent on auctions as a mode of primary marketing of tea. There is also a clear seasonality in prices of tea within a year. One of the variables explaining the variance in auction prices is unit export price. Higher export price raises the bargaining position of sellers at auctions. Export volume also has an influence on the price formation at auctions as higher export reduces domestic availability and hikes up domestic price. Further, lots offered and quantity sold are inversely related with average price realization at auction, whereas lots sold are positively related with average price realization.