Kolkata: Tea producers are up in arms against a new regulation introduced this year that requires them to sell at least half of their produce through auctions, and wants the Union commerce ministry to allow them to sell through any channel of their choice.

A recent study by the Indian Tea Association (ITA), a lobby, shows that in the past two years, the share of cheaper varieties of Assam tea—priced at 100-129 a kg—had gone up in auctions by 13 percentage points at the cost of expensive ones—priced at 180-200. Such a shift in appetite at auctions has never been seen before, said C.S. Bedi, managing director of Rossell India Ltd, a tea company.

Despite the introduction of pan-India auctions this year by the Tea Board of India with the intention of improving price discovery, ITA claims the system is far from perfect and is still not yielding for producers from Assam remunerative prices. The state accounts for 65-70% of tea produced in India. Even the volume of unsold lots at auctions has risen —a sign that the Tea Board has not been able to deepen the market, according to ITA.

This year, the average price of low-grade CTC and dust variants of Assam tea fell by 7.47 to 156.12 a kg from 163.59 a year ago, according to ITA. (CTC is abbreviation for crush, tear and curl—a variety derived from processing, which turns tea leaves into granules.) Even the price of higher-quality of Assam crop is fetching 35-40 a kg lower on average at auctions this year, according to Arijit Raha, ITA’s secretary general.

Demand for tea at auctions has suddenly dropped this year, said J. Kalyansundaram, secretary general of Calcutta Tea Traders Association, a registered auction organizer. According to him, 28-30% of lots sent to auctions are not finding buyers, compared with 20-22% last year.

The unsold lots wind back into catalogues in three weeks but producers have to bear the cost of holding it, according to Rossell’s Bedi. This inventory of unsold tea also stretches working capital cycle, he said, whereas transaction costs in private sales are much lower.

Because of the changes made to the auction system, there were “serious disruptions", said an auctioneer, who did not want to be identified. As a result, key procurers of tea from Assam turned to buying through private sales, and that, in turn, “led to poor price realizations through auctions".

ITA says because of tepid demand through auctions this year, some producers are unable to recover production costs, which, on average, has grown at a compound annual rate of 10% over the past decade. Tea prices, on the other hand, increased 6-7% only during this period, squeezing margins for most producers.

To make auctions meaningful, Tea Board should make it mandatory for buyers, too, to purchase half of their requirement from auctions, said Bedi.

About half of India’s 1.2 billion kg is sold via auctions, and the balance sold through private sales, which is an evolved channel for some producers.