Is tea futures trading feasible?

by Surekha Galagoda

The tea industry and the Securities and Exchange Commission (SEC) is planning to introduce tea futures trading to the country to allow risk hedging of tea, the weekly tea report by Bartleet Produce Marketing said.

A top official of the SEC who declined to comment said that these details should be got from the tea trade.

The rationale of the prime movers is that it could reduce the volatility currently experienced by producers while the island's capital markets would also benefit. The move has already won the support of the Asian Development Bank, Sri Lanka's leading lender, they said. External Relations Officer Shavindra Fernando told the Sunday Observer that they have not received any information on this as yet.

According to the prime movers if this system is implemented a futures market would bring a significant degree of stability to the industry that is prone to frequent changes in weather patterns that have an impact on crop quality, particularly for high grown varieties.

Market fluctuations make budgeting for the future a difficult exercise for producers. A tea futures market will essentially sell tea on a fixed date in the future at a specified price.

It allows producers to hedge the risk of future price changes while extending an opportunity for speculators to make a profit by predicting market changes.

The proposal envisages a tea futures market for low, medium and high grown teas.

According to the tea trade a standardised quality is needed for tea futures trading to take place. Therefore, it is possible to introduce tea futures trading for Kenya and Indian Tea but not for Ceylon Tea as it is a speciality tea with wide diversity in grade and quality.

Around two to three years ago there was also a similar move and the consultants who conducted the study said that introducing tea futures trading was not practical for Ceylon Tea.

Therefore as far as the tea industry is concerned it will be a non starter, said the source. Some years ago even the Central Bank was keen that the tea industry goes ahead with the move. Considering all these factors it will only be a waste of resources, said the industry source.

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