To quote the avuncular, emaciated Iroh, former Fire Nation general and tea lover from Avatar: The Last Airbender: “The key to wisdom and tea is proper aging.”
Therefore, he would be disappointed if he learned that tea has no future market in our world.
Commodity traders are happy about the latest sugar harvest data in Brazil or rainfall figures in Vietnam's rice fields – but they can largely ignore similar signs for tea, the world's second most popular drink after water.
In a futures market, creditors and investors agree to purchase a generic commodity at a future price, accepting either the risk or reward of the commodity if it is sold at delivery below or above the price they agreed upon.
Futures markets are, of course, crucial to both the agricultural and financial sectors – they allow farmers to guarantee compensation even if they have a poor growing season and allow investors to diversify their portfolios with countercyclical assets.
As a result, there are futures markets for almost all foods and minerals, including steel, gold, coffee, sugar, orange juice and wheat. But no tea (or onions or movie tickets, for various reasons).
To understand why, we need to delve into the world of tea.
Tea, as we know it in the Western Hemisphere, consists of all kinds of flowers, herbs, fruits and leaves placed in a paper or plastic bag (mmm… delicious microplastics), dipped in hot water and drunk, preferably with one messy glass. crumbly cookie. (Ed.: Or a cookie – this is as good a time as any to acknowledge that we naively allowed an American to write this piece.)
But as a commodity, tea is defined only as the dried leaf of Camellia sinensis, the plant from which both black and green tea are derived (as well as other teas such as oolong, white tea, dark tea, matcha… but we'll get to that). in one minute). This excludes all herbal teas and mate, the popular Argentine drink made from the caffeine-rich leaves of Ilex paraguariensis (lo siento, Argentina).
Camellia sinensis is a wonder plant that can grow in different seasons, climates and conditions around the world. Thanks to international trade and colonialism, different tea cultures and varieties now span six continents.
China dominates green tea production, but black tea is an important crop for India, China and Sri Lanka.
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Consumption is similarly widespread, with both black and green tea enjoyed around the world.
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Tea's popularity rose due to Covid-19 and the wellness movement – you can now walk into any cafe in the developed world and ask for a matcha, chai latte (or a “chai tea”, to the dismay of many Indian readers). . , or any other esoteric mix you might like. Industry experts expect both production and consumption to accelerate over the next decade.
But that brings us to the first general reason why there is no futures market for tea: the harvest is too good.
Check out tea's long-time caffeinated nemesis: coffee. It is seasonal, there are few climates in which coffee plants can be grown, and it can be difficult for farmers to predict annual production due to uncertainty in annual rainfall, temperature and humidity.
There is no such problem with tea. It grows all year round and thrives in different altitudes and climates. Therefore, it is relatively easy for farmers to predict their annual production, and even if there are circumstances that destroy a farmer's yield, the volatility is short-lived as the tea can be harvested again almost immediately.
The second main reason is its variability. Tea is a heterodox product with a range of “colors” (white, red, dark) and types of tea that can be made from the same base leaf. However, for a futures product to be profitable, the underlying commodity must be consistent and tradable (consumers do not distinguish between Ukrainian and American wheat, for example). Coffee achieves this by segmenting similar coffee varieties into two “reference varieties”: Robusta and Arabica (Java does not have its own futures market). It uses the reference varieties as a price base for the entire market, and premiums can be added to the standard price index for futures contracts for more sophisticated coffee varieties.
Despite these hurdles, there are good reasons to open a tea futures market and many have advocated for it, including tea farmers who fear the impact of climate change and geopolitics on the tea industry. The UN Food and Agriculture Organization has even held summits and published reports on the possibility of futures markets for Indian and Chinese tea.
Around 70 percent of the world's tea comes from small farmers in the so-called global south. Additional price certainty through a futures market would help protect these inherently more fragile businesses, especially as climate change threatens to further impact tea yields and prices.
Coffee prices have historically moved similarly to tea, although the coffee price spike in 2021 was a reminder of how volatile prices can be. The tea remained stable – but it may not stay that way forever:
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Despite the variety contained in the “tea” label, a reference variety could be created for the generic black and green tea that is sold en masse to companies like Lipton and Twinings, blended and packaged for Western consumers. Premiums such as oolong or rarer black and green varieties could then be classified under a similar premium system to specialty coffees.
Essentially, a “reference strain” is a state of mind. Take this statement from a 2018 UN-FAO report on creating a tea futures market:
The coffee itself is not standardized: individual differences in quality, even if they vary from batch to batch, are clearly recognized and appreciated. However, coffee sector participants have become accustomed to viewing their product in terms of a somewhat abstract “standard contract” rather than existing in isolation. While this requires a change in mindset, a similar mechanism could be feasible for a tea futures contract.
And some markets have already become somewhat standardized and interchangeable. In India, most major tea packers require the tea to be crushed into uniform pieces to reduce the volume of the tea bags, which is known as CTC (Crush, Tear, Curl) tea. CTC teas account for 90 percent of the Indian tea market and 64 percent of the global tea market and are largely interchangeable, unlike the more “artisanal” brands such as Darjeeling or white tea, which are seen as a reason the future market cannot be created.
And even for artisanal teas, certain countries already have a rating system in place, similar to the standardized premiums for other goods. Depending on the size of the leaf and the maturity at which it is harvested, tea in India and Sri Lanka is produced on a scale from “dust” to the premium “orange pekoe” (a fancy name that essentially just means large, fancy leaves means). .
For a tea futures market to emerge, a few things need to happen. Auctions, where producers and packers set daily prices for tea brought to market, must be standardized and transparent, rather than one-off agreements between farmers and producers.
According to UN FAO economist El Mamoun Amrouk, there are some developments in this direction. “Some countries have decided to develop electronic auctions for tea trading.”
Interest and financial contracts would then have to be made available to farmers, which is apparently also in progress. Sparsh Agarwal, owner of Selim Hill Tea Garden in India, is one of the producers experimenting with new types of contracts:
We started selling our products through futures contracts with our packers and buyers and it is the best business we have ever had. It's not a futures market and it's much smaller, but I would imagine it would be more common.
An intermediary would then need to set up an exchange and investors could start purchasing futures contracts.
But there is another barrier. Although tea is a globally popular product, it has remarkable domestic dynamism.
Unlike coffee, which has a global supply chain and where agricultural products from developing countries are roasted and consumed primarily in Europe and North America, tea consumption appears to be best done at home: only 37 percent of tea is exported, compared to 72 percent Percent Premade Tea -Roasted Coffee. Instead, the tea from major producers such as China, India and Turkey serves their own large domestic markets. Only Kenya, Sri Lanka and a few smaller producers export the majority of their tea to OECD countries.
As tea becomes more popular in developed countries, it would need to become even more popular for a futures market to emerge.
In Avatar: The Last Airbender [SPOILER]Uncle Iroh eventually decides to avoid the successful tea shop he runs in a working-class neighborhood in favor of opening a fancy tea shop in the more expensive part of town.
While the impact of his decision on the class may have worried some viewers, Iroh may have been right. To secure tea's future, it may need to become more popular in financial centers.
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